[Senate Hearing 109-898]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-898

   EXAMINING ENFORCEMENT OF CRIMINAL INSIDER TRADING AND HEDGE FUND 
                                ACTIVITY

=======================================================================

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                       TUESDAY, DECEMBER 5, 2006

                               __________

                          Serial No. J-109-121

                               __________

         Printed for the use of the Committee on the Judiciary













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                       COMMITTEE ON THE JUDICIARY

                 ARLEN SPECTER, Pennsylvania, Chairman
ORRIN G. HATCH, Utah                 PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona                     JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio                    HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama               DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
JOHN CORNYN, Texas                   CHARLES E. SCHUMER, New York
SAM BROWNBACK, Kansas                RICHARD J. DURBIN, Illinois
TOM COBURN, Oklahoma
           Michael O'Neill, Chief Counsel and Staff Director
      Bruce A. Cohen, Democratic Chief Counsel and Staff Director

















                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa.     5
    prepared statement...........................................  1248
Specter, Hon. Arlen, a U.S. Senator from the State of 
  Pennsylvania...................................................     1

                               WITNESSES

Aguirre, Gary J., former Investigator, Securities and Exchange 
  Commission, Washington, D.C....................................    13
Berger, Paul R., former Associate Director, Division of 
  Enforcement, Securities and Exchange Commission, Washington, 
  D.C............................................................    22
Blumenthal, Richard, Attorney General, State of Connecticut, 
  Hartford, Connecticut..........................................     3
Hanson, Robert B., Branch Chief, Division of Enforcement, 
  Securities and Exchange Commission, Washington, D.C............    15
Kreitman, Mark, Assistant Director, Division of Enforcement, 
  Securities and Exchange Commission, Washington, D.C............    19
Ribelin, Eric, Branch Chief, Office of Market Surveillance, 
  Securities and Exchange Commission, Washington, D.C............    25
Stachnik, Walter J., Inspector General, Securities and Exchange 
  Commission, Washington, D.C....................................    38
Tenpas, Ronald J., Associate Deputy Attorney General, Department 
  of Justice, Washington, D.C....................................     6
Thomsen, Linda C., Director of Enforcement, Securities and 
  Exchange Commission, Washington, D.C...........................    17

                         QUESTIONS AND ANSWERS

Responses of Gary J. Aguirre to questions submitted by Senators 
  Grassley and Specter (Note: This material has been redacted by 
  the staffs of Senators Specter and Grassley.)..................    44
Responses of Paul R. Berger to questions submitted by Senators 
  Specter and Grassley...........................................   440
Responses of Robert B. Hanson to questions submitted by Senators 
  Specter and Grassley...........................................   447
Responses of Mark Kreitman to questions submitted by Senators 
  Grassley and Specter...........................................   453
Responses of Eric Ribelin to questions submitted by Senator 
  Specter........................................................   457
Responses of Walter J. Stachnik to questions submitted by 
  Senators Specter and Grassley..................................   459
Responses of Ronald J. Tenpas to questions submitted by Senator 
  Specter........................................................   479
Responses of Linda C. Thomsen to questions submitted by Senators 
  Grassley and Specter...........................................   499

                       SUBMISSIONS FOR THE RECORD

Aguirre, Gary J., former Investigator, Securities and Exchange 
  Commission, Washington, D.C., statements and attachments (Note: 
  This material has been redacted by the staffs of Senators 
  Specter and Grassley.).........................................   509
Berger, Paul R., former Associate Director, Division of 
  Enforcement, Securities and Exchange Commission, Washington, 
  D.C., statement and attachment.................................  1221
Blumenthal, Richard, Attorney General, State of Connecticut, 
  Hartford, Connecticut, statement...............................  1244
Hanson, Robert B., Branch Chief, Division of Enforcement, 
  Securities and Exchange Commission, Washington, D.C., statement  1250
Kasowitz, Marc E., Counsel, Alliance for Investment Transparency, 
  Washington, D.C., statement....................................  1256
Kreitman, Mark, Assistant Director, Division of Enforcement, 
  Securities and Exchange Commission, Washington, D.C., statement 
  and attachment.................................................  1262
Tenpas, Ronald J., Associate Deputy Attorney General, Department 
  of Justice, Washington, D.C., statement........................  1268
Thomsen, Linda C., Director of Enforcement, Securities and 
  Exchange Commission, Washington, D.C., statement and 
  attachments....................................................  1276
Wood, John P., CEO & Chairman of the Board, Telos Corporation, 
  Ashburn, Virginia, statement...................................  1315


















 
   EXAMINING ENFORCEMENT OF CRIMINAL INSIDER TRADING AND HEDGE FUND 
                                ACTIVITY

                              ----------                              


                       TUESDAY, DECEMBER 5, 2006

                                       U.S. Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:32 a.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Arlen 
Specter, Chairman of the Committee, presiding.
    Present: Senators Specter and Grassley.

 OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM 
                   THE STATE OF PENNSYLVANIA

    Chairman Specter. Good morning, ladies and gentlemen. The 
Judiciary Committee will now proceed with this hearing on 
enforcement of insider trading and the issue of hedge funds, 
where we now find enormous growth, to more than $1 trillion a 
year, some 30 percent of the U.S. stock transactions.
    Sarbanes-Oxley had included in it provisions for criminal 
law enforcement which came out of hearings from the Judiciary 
Committee, and this is the third in a series of hearings by the 
Judiciary Committee into this very important subject.
    We have circulated draft legislation which will be the 
subject of comment here today. A concern about Federal court 
decisions prohibiting coordination between the Securities and 
Exchange Commission and the Department of Justice invalidating 
two criminal prosecutions. A question arises as to why that 
should be. What is the problem with having the SEC and the 
Department of Justice coordinate?
    We find that the whistleblower provisions of existing law 
have not been utilized by the Securities and Exchange 
Commission, and the draft legislation has a proposal to make 
awards at the discretion of the Attorney General in substantial 
amounts to whistleblowers who have proceeds going to the 
Federal Government by way of fine or settlement or other 
enforcement mechanisms.
    And with the development of the hedge funds so that there 
are many who are now investing, the so-called smaller 
investors, the issue arises as to whether there ought to be 
regulation. That is really essentially a matter for the Banking 
Committee, and I have talked to Senator Shelby, the Chairman, 
about that.
    The Judiciary Committee is making an inquiry, as is the 
Finance Committee, led by Chairman Senator Grassley, who is 
also a member of this Committee. And the draft legislation has 
a provision which would call for regulation where there are 
pension funds involved. Those are subjects which we are going 
to be considering in the course of today's hearing.
    The issue of the investigation into charges brought by Mr. 
Gary Aguirre has attracted the attention of the Committee. 
There are a number of factors which raise issues. We have had 
the unusual result of Mr. Aguirre being involved in a very 
important SEC investigation and having favorable evaluations of 
his job and two pay raises, and then when he presses an 
investigation to have suddenly a re-evaluation as to what he 
has been doing and to have him terminated.
    We have another investigator in the SEC expressing concerns 
about the nature of the investigation, what has been happened, 
and submits an e-mail after being asked to be relieved of his 
responsibilities that there is something smelly going on.
    Then you have no action taken by the SEC until the Senate 
investigation is initiated. You have the deposition taken of 
Mr. Mack long after it might have been taken in the ordinary 
course of business, and, curiously, 5 days after the statute of 
limitations has run.
    You have the Inspector General of the SEC closing out an 
investigation without interviewing Mr. Aguirre. A little hard 
to understand that kind of investigative technique.
    What is the explanation? Well, that is something that this 
Committee is going to try to find out. At best, it looks like 
extraordinarily lax enforcement by the Securities and Exchange 
Commission. That is at best. And at worst, it has the overtone 
of a possible coverup. And those are difficult matters to 
ascertain, but we are dealing here with a very, very important 
subject.
    We are dealing with communications between individuals 
where there appears to be inside information on a pending 
merger and some $11 million is gained by transactions related 
to that. And the matter is referred to the SEC, and nothing is 
done for 2 years. Then finally, when the investigation by Mr. 
Aguirre is picked up, those events occur.
    Well, maybe it is just smoke and maybe there is no fire, 
but where you have hedge funds with as dominant a role as they 
are playing in the economy, more than $1 trillion, and their 
expansive nature in picking up smaller investors, pension 
funds, and this Committee is charged with oversight on 
enforcement, these are very, very important matters.
    In reviewing the orderly sequence for today's hearing, I 
had wanted the witnesses who were at the table now as to panel 
one, but I believe it would be more efficient to alter the 
presentation.
    So we are going to hear first from Associate Deputy 
Attorney General Ronald Tenpas and Connecticut Attorney General 
Richard Blumenthal. So if you gentlemen would step back, and 
Mr. Tenpas and General Blumenthal will step forward, and Ms. 
Linda Thomsen will be in the second panel.
    Our first witness this morning will be Connecticut Attorney 
General Richard Blumenthal, an outstanding record in public 
service, having served in the Connecticut State Senate, State 
House of Representatives, and as a U.S. Attorney for the 
District of Connecticut, was law clerk to Justice Harry 
Blackmun, formerly assistant to Senator Abraham Ribicoff, and 
Presidential assistant to Daniel Patrick Moynihan before he 
became a Senator; Phi Beta Kappa graduate of Harvard and law 
school from Yale and editor of the Yale Law Journal. Pretty 
good pedigree, Mr. Blumenthal. We welcome you here and look 
forward to your testimony.

  STATEMENT OF RICHARD BLUMENTHAL, ATTORNEY GENERAL, STATE OF 
               CONNECTICUT, HARTFORD, CONNECTICUT

    Mr. Blumenthal. Thank you very much, Mr. Chairman. I 
appreciate this opportunity to be with you again, and I want to 
thank you, as Chairman of this Committee, as well as the 
Committee itself for its leadership in this absolutely critical 
area, focusing not only on the specific instance--that you have 
just outlined so well--of potential problematic laxity in 
investigation, but also on the more general problems that arise 
with respect to hedge funds. And with your permission, I would 
like to present a much abbreviated version of my testimony and 
then have the full text entered in the record.
    Chairman Specter. Attorney General Blumenthal, your full 
statement will be made a part of the record, as will all other 
statements, and we appreciate your summarizing.
    Mr. Blumenthal. Thank you.
    As you very correctly observed, hedge funds have become 
more and more retailed in the financial markets to investors 
who are no longer the wealthy and sophisticated individuals who 
once were viewed as the sole kind of investors in hedge funds, 
and now the $1 trillion and 9,000 hedge funds that are involved 
in this industry span a much broader section of the American 
public.
    But, equally important, they involved investment vehicles 
and instruments such as credit default swaps and increasing use 
of public offerings, bonds and so forth, that can impact the 
markets.
    The investments in commodities, as we saw with Amaranth, 
can have a huge, sweeping effect on those markets and 
potentially for good, but also for ill. And so I think that the 
emphasis in the draft discussion bill on greater disclosure of 
risk strategy and of other very relevant factors in operation 
of hedge funds is absolutely going in the right direction.
    I want to emphasize also the importance of protecting 
whistleblowers, and I think that point is directly relevant to 
the specific subject relating to Pequot Capital that brings us 
here today or has elicited the Committee's attention.
    The kinds of rewards for whistleblowers we have found in 
our investigation, protection for people who are willing to 
risk their lives and livelihoods, their careers and 
reputations, is critical, and the idea of providing, for 
example, 30 percent of any sort of civil fines and penalties, 
as a maximum 30 percent, as much as 30 percent, is a very, very 
promising concept, and I think in my view, based on my 
experience in our investigation, is a very worthwhile avenue to 
pursue.
    I want to also emphasize the importance of concurrent 
jurisdiction--it is mentioned in my testimony, but I think, 
again, it is an area that acquires even greater importance in 
light of the potential problems in the Pequot Capital 
investigation by the SEC--concurrent jurisdiction that enables 
States to be active participants and partners, but also 
empowered to conduct their own investigations in this area if 
necessary has been one of the lessons, I think, in recent 
history, whether in securities, insurance, environment, the 
role of States in active, aggressive law enforcement where the 
Federal Government, either purposely or inadvertently, abandons 
the field or fails to be sufficiently aggressive is a lesson 
that I think is applicable here as well.
    The kinds of experiences we have had in Connecticut with 
hedge funds, whether Amaranth or Bayou, others obviously across 
the country where there have been failures, I think emphasize 
the importance of that concurrent jurisdiction where States 
like Connecticut which have a very heavy representation of 
hedge funds can be an active participant is very important, in 
my view.
    And, finally, I want to just emphasize one very important 
feature of changing the law that I think should be examined by 
the Committee. Raising the net worth or income levels that are 
required for participation in hedge funds is one of the most 
important steps that this Committee could take or that the SEC 
could take, because it will raise the bar, so to speak, and 
enable investors themselves to be of the type that can do their 
due diligence, that will have the assets and the sophistication 
that hedge funds initially were supposed to provide, and that 
hedge fund investors were supposed to have.
    And so I would suggest, for example, that the net worth 
requirements be raised to $2 million--presently they are $1 
million--or higher, and that the minimum income requirements 
for investors be raised far higher than the $200,000 now, as an 
alternative to that $2 million, perhaps on the order of 
$500,000.
    These numbers are illustrative, as I indicate in my 
testimony, but, again, such requirements would help ensure that 
hedge fund investors are capable of doing the due diligence and 
assessing the risk that informed hedge fund participation 
requires.
    I want to again thank the Committee for giving me this 
opportunity and look forward to continuing my contribution as 
someone who comes from a State where hedge funds are a big part 
of our economy. We want there to be Federal action rather than 
a patchwork of different State rules or guidelines.
    We want the Federal Government to take the lead because we 
want to avoid disadvantaging hedge funds in any single State, 
and instead we should have uniform national rules, stronger 
protections for investors in disclosure and accountability than 
we do now.
    Thank you.
    [The prepared statement of Mr. Blumenthal appears as a 
submission for the record.]
    Chairman Specter. Well, thank you, Attorney General 
Blumenthal. We appreciate your coming back to testify, and we 
appreciate what you are doing on the State level, and we thank 
you for being with us.
    We have been joined now by Senator Grassley, who, as I had 
mentioned earlier, has taken the lead with the Finance 
Committee on inquiries into what is happening with hedge funds. 
He is chairing another hearing, so since he is a distinguished 
member of the class of 1980, one of the two remaining members 
of that class, I am going to yield to him at this time.

STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM THE 
                         STATE OF IOWA

    Senator Grassley. Thank you. I appreciate your courtesies. 
I also appreciate your continued cooperation that you have 
given with my Committee in working on this issue.
    I also ought to appreciate the cooperation of the 
Securities and Exchange Commission, and particularly Chairman 
Cox, in providing documents, information, and witnesses to both 
the Finance and Judiciary Committees during this investigation.
    The SEC is recognizing the constitutional responsibility of 
Congress to conduct oversight of Federal agencies. A lot of 
other Federal agencies, especially Health and Human Services 
and the Justice Department, could learn a lot from this good 
example set by the SEC.
    Now, today's hearing is the second by this Committee 
relating to penalties for criminal enforcement of illegal 
insider trading, and the third that has discussed the evolving 
role involving hedge funds.
    And so I want everybody to know that I share Chairman 
Specter's concerns about the extent of insider trading and its 
impact on public confidence in the fairness and integrity of 
the stock market.
    This Committee has jurisdiction over criminal laws, and 
with today's hearing we need to see if the laws on the books 
are strong enough to see that they are enforced in a way that 
Congress intended.
    We are also here today to discuss allegations brought by 
the former SEC Attorney Gary Aguirre. His allegations led to a 
joint Finance/Judiciary Committee investigation on whether 
there was retaliation against this SEC lawyer for his role in 
the investigation of a large hedge fund. The Senate 
investigation also focused on the original investigation of 
these allegations by the Inspector General of the SEC.
    Today we will hear about findings from the Senate 
Committees' investigation along with information learned 
through witness interviews and an extensive review of SEC 
documents. We will dig into why the Inspector General failed to 
uncover important evidence corroborating many of these 
allegations.
    We will also question Mr. Aguirre's supervisors about the 
debate that went on inside the SEC about whether and when to 
ask a high-profile Wall Street executive some key questions 
during its insider trading investigation.
    The resistance of the SEC to taking Mr. Mack's testimony 
until after the press and Congress put a spotlight on issues 
raised serious questions for me about whether captains of 
industry get the same treatment as regular investors or whether 
they get treated with kid gloves.
    Finally, we will question Mr. Aguirre's supervisors about 
the SEC's personnel process and why they created an alternative 
negative evaluation of Mr. Aguirre that was not submitted into 
his personnel file until after they fired him.
    I would like to hear how they can square that with his 
original positive evaluation and the pay increases that he got. 
It looks like that negative evaluation was only created after 
Mr. Aguirre started complaining to his supervisors that it was 
unfair to treat John Mack differently than the SEC would treat 
an average investigation in the same situation. That is not a 
legitimate reason to go back and change an employee's 
performance evaluation.
    These issues point to problems within the agency that 
distract from the core mission of protecting investors. This 
hearing can kick-start some necessary changes at the SEC. This 
hearing is about finding solutions as well as exposing 
problems.
    I thank you, Mr. Chairman. I will be back to ask questions.
    [The prepared statement of Senator Grassley appear as a 
submission for the record.]
    Chairman Specter. Thank you very much, Senator Grassley. 
Thank you for your leadership and extensive work this on this 
important subject.
    Senator Grassley. Thank you.
    Chairman Specter. We now turn to Associate Deputy Attorney 
General Ronald Tenpas, who has responsibilities including 
coordinating work by the President's Corporate Fraud Task Force 
and reviewing policy proposals related to preventing and 
punishing crimes in the corporate world.
    Previously, Mr. Tenpas was U.S. Attorney for the Southern 
District of Illinois and an Assistant U.S. Attorney in both the 
Middle District of Florida and the District of Maryland. He 
clerked for Chief Justice Rehnquist and Judge Pollak of the 
Eastern District of Pennsylvania; bachelor's degree from 
Michigan, law degree from the University of Virginia, and a 
Rhodes scholar.
    Thank you for being with us today, Mr. Tenpas, and the 
floor is yours.

   STATEMENT OF RONALD J. TENPAS, ASSOCIATE DEPUTY ATTORNEY 
        GENERAL, DEPARTMENT OF JUSTICE, WASHINGTON, D.C.

    Mr. Tenpas. Thank you, Senator Specter. Thank you for the 
opportunity to be back and talk again about this issue.
    I thought in my opening I would focus my remarks on the 
bill's criminal provisions, the draft bill that you have shared 
with us, and try to highlight the effect some of those 
provisions would have on our criminal enforcement efforts.
    As we discussed in my prior appearance here, there is a 
division of labor in this arena between the civil and criminal 
enforcement effort, with DOJ having the lead in the criminal 
enforcement arena.
    Let me start my discussion with Section 4 of the bill. This 
section would amend Title 18, Section 1348, by adding a new 
subsection (b) that would expressly prohibit insider trading.
    We believe it could be helpful to put insider trading 
offenses on a firmer statutory footing than they now stand, 
which is really as a species of judicially recognized Title 15 
offenses where Title 15 prohibits schemes to deceive associated 
with the offering and sale of securities. So creating some 
statutory clarity here in that court-created arena could be 
helpful to us.
    We do have a number of concerns about the specifics 
reflected in the bill. For example, the section is entitled 
``Willful misuse of material nonpublic information.'' Yet the 
new paragraph (b)(2)(1)(A) incorporates a ``knowingly'' 
standard, while paragraph (b)(2)(1)(B) provides no explicit 
scienter requirement.
    The new subsection (b) as currently worded introduces at 
least two substantial changes from current law. It eliminates 
the element that a person who is charged with insider trading 
be shown to have a ``duty'' with respect to that information.
    We have concerns that eliminating this requirement 
potentially subjects to criminal sanctions those who might 
innocently come by valuable information and trade on it. 
Conversely, the draft bill essentially adds a new affirmative 
defense that trading on inside information is acceptable if 
that information was ``gained by...research and skill.''
    Such a formulation will make it more difficult to prove 
insider trading than is the case under current law where no 
such defense exists. Similarly, some of the phrases, such as 
``of a specific nature'' and the phrase ``significant factor,'' 
which are included in the legislation, would impose burdens 
that we do not currently face, and so give us concern.
    We think perhaps a better model may be to look to the 
definition of ``insider trading'' that the SEC has already 
promulgated through its regulatory process and then build from 
that if any adjustments are necessary. Obviously, we would be 
happy to work with you and other members of the Committee on 
such an effort going forward.
    Similarly, in Section 4, paragraph (c), we welcome the 
effort to make clear the Department's authority to investigate 
insider trading offenses and to do so in a manner that involves 
express coordination with our partners at the SEC.
    As you noted, there have been a couple of court decisions 
in this arena recently, and the United States has appealed one 
of those decisions that has, unfortunately, created potential 
barriers to the conduct of parallel investigations.
    Thus, while we welcome the thrust of the effort to cure 
some of this, we would urge that any final decisions on how to 
respond be made after the appellate court releases its decision 
so that we can ensure that any legislation provides as 
comprehensive a fix as possible in light of where the law will 
stand at the time of that decision.
    Even as that section is framed right now, there are things 
that we would hope to have a chance to work with you and the 
Committee on to perhaps tweak a bit. Proposed paragraph (c)(2) 
of Section 1348 would provide that neither the Attorney General 
nor any other Federal agency would have a duty to disclose any 
investigation or to disclose any contacts made with a companion 
agency to ``request or receive evidence,'' is the language in 
the bill.
    But we have traditionally coordinated our efforts with the 
SEC through more than just requesting or receiving evidence. 
Thus, this language might be argued to cut back on rather than 
to confirm the proprietary of some of these traditional 
coordination efforts.
    And, similarly, the language in the proposed bill applies 
only to investigations of violations of ``this section,'' i.e., 
Section 1348 of Title 18. Yet we continue to have parallel 
proceedings that involved other criminal provisions of Title 18 
and Title 15, which could be equally frustrated or affected by 
these court decisions. And so, again, we would be concerned 
about some of the particular language contained in the bill.
    Let me also briefly turn to Section 5, the section to 
create incentives for private citizens to report and assist in 
the investigation of insider trading. We always welcome the 
assistance of private citizens who report criminal acts.
    However, giving such substantial financial incentives to 
individuals to make criminal allegations would be a fairly 
dramatic departure from past practice in the criminal arena and 
will introduce new complexity for us and, thus, raise concerns.
    Such financial incentives may produce not only meritorious 
allegations that are helpful, but also false allegations that 
can result in individuals being false accused.
    It will be important grist for impeachment of key 
government witnesses, and we are concerned about whether the 
factors the statute indicates should be considered in 
fashioning a reward amount are meant to be exhaustive or only 
illustrative.
    For example, we think it would be significant to consider 
whether the person who provides the information was himself 
complicit in the crime, and that is not a factor that is 
identified as a factor for consideration.
    Let me conclude there. I have laid out in more detail in 
the written testimony other examples of specifics that we 
observe we would like the opportunity to work with the 
Committee on further.
    Thank you.
    [The prepared statement of Mr. Tenpas appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Mr. Tenpas.
    I will include in the record at this point a statement from 
Mr. John P. Wood, Chief Executive Officer and Chairman of the 
Board of the Telus Corporation, a four-page analysis favoring 
the draft legislation.
    [The prepared statement of Mr. Wood appears as a submission 
for the record.]
    Chairman Specter. Mr. Tenpas, the jurisdiction of the 
Judiciary Committee led to the enactment of 18 United States 
Code 1348 Criminal Code in 2002, and the question I have for 
you at the outset is: How many indictments have been brought 
under that statute?
    Mr. Tenpas. We have brought just over 50. I think the 
number is around 53, 54, something in that neighborhood.
    Chairman Specter. And how many of those involved insider 
trading?
    Mr. Tenpas. We do not have a good way to measure that, 
Senator.
    Chairman Specter. Why not?
    Mr. Tenpas. Because as I alluded to earlier, insider 
trading is a species of schemes to defraud, and so we simply--
in our statistical programs that track this, we track the 
statute that has been charged. We do not necessarily track sort 
of the underlying theory that has been used. Is it insider 
trading? Was it accounting fraud or any of the other kinds of 
things that might be a violation of the statute?
    Chairman Specter. Mr. Tenpas, insider trading is 
sufficiently important so that I think it would be very useful 
to this Committee if you would make that identification, 
because that is a little different species. So would you 
endeavor to do so?
    Mr. Tenpas. We will do so.
    Chairman Specter. Mr. Tenpas, just last Thursday, on 
November 30th, Mr. Michael Tom of Global Time Capital Growth 
Hedge Fund was given 3 years' probation in Boston involving a 
trading tip that Citizens Bank would be acquiring Charter One 
Financial. He made a $750,000 profit on that transaction and 
got 3 months' probation. Is that sentence adequate?
    Mr. Tenpas. I am not--
    Chairman Specter. You have been an Assistant U.S. Attorney 
in two districts, a U.S. Attorney in one district. The 
assistant prosecutors have a pretty good feel for that, and I 
recall my days as an Assistant D.A. Three months' probation for 
$750,000? That is more than you get paid, $250,000 a month. 
What do you think?
    Mr. Tenpas. I am simply not familiar with the specifics. We 
would be happy to go back and look at it and advise the 
Committee of what went into fashioning that sentence. 
Obviously, as you are aware, the sentence ultimately is 
determined by the court, and I am not--
    Chairman Specter. Oh, is that so?
    Mr. Tenpas. I am not certain whether the United States made 
a particular recommendation in that case or not.
    Chairman Specter. Well, is there any coordination on DOJ 
recommendations? The Department of Justice does make 
recommendations. We do know that it is up to the judge.
    Mr. Tenpas. Certainly the United States Attorney's Office 
will--the prosecutor assigned to the case will typically make 
some--give some indication at the sentencing of the appropriate 
sentence.
    Chairman Specter. Well, that is a pretty big case. I would 
have thought that you would have had some familiarity with 
that. You are in a key position. Aren't those matters brought 
to your attention for your input?
    Mr. Tenpas. A case of that magnitude would not necessarily 
or routinely--
    Chairman Specter. What magnitude would it take?
    Mr. Tenpas. It is usually going to be bigger than that, in 
the several millions of dollars. Our U.S. Attorney's Offices 
routinely handle matters in which the loss or the fraud is in 
the hundreds of thousands of dollars, and so a case of that 
magnitude, given what you have described, is not something that 
I would routinely expect to come to officials in Washington.
    Chairman Specter. Mr. Tenpas, let me suggest to you that 
$750,000 is significant and that it is a very bad sign to get 3 
months' probation on that kind of a case.
    Attorney General Blumenthal, there has been the overall 
approach that voluntary procedures within the industry would be 
sufficient, and after the Long Term Capital Management collapse 
8 years ago, voluntary industry changes were implemented to 
control potential abuses in hedge funds.
    And then as you noted in your testimony, Amaranth came 
along recently, some $9 billion in losses. How do you evaluate 
the overall approach that the industry can regulate itself, 
that the bank's involvement puts them sufficiently at risk so 
that they will make independent inquiries and that it is not 
necessary to have governmental regulation?
    Mr. Blumenthal. I think that there is a growing consensus 
within the hedge fund industry that measures to require greater 
transparency are inevitable and necessary. The voluntary self-
policing I think continues to put at risk lenders to the hedge 
funds, commodity markets, as well as individual investors that 
now include pension funds, university endowments, a much 
broader cross-section of the investing public.
    Chairman Specter. When you mention voluntary procedures, 
just what does that involve?
    Mr. Blumenthal. Essentially it involves primarily the 
investor doing the due diligence and getting from the hedge 
fund information that is thought necessary about investment 
strategies, types of investments, degrees of return, past 
performance, baseline performance, compensation for hedge funds 
managers--all of the key areas that are identified in your 
proposed draft bill.
    And I think that is one of the very central points about 
this draft bill, that it identifies that information, through 
Subdivisions A, B, C, D, E, the investment objectives and 
strategies, the risks, the side agreements, the extent of 
audits.
    I think those are the key pieces of information that right 
now, to answer your question directly, are voluntarily 
provided, supposedly, by the hedge funds. The problem is that a 
lot of the investors, even some of the largest pension funds 
and endowments and others that should have that analytical 
ability, simply either lack it or are not provided with 
complete information. And right now there really is not the 
kind of oversight and scrutiny that this bill envisions for 
that truth-telling process, that disclosure.
    Chairman Specter. Did Amaranth involve pension funds?
    Mr. Blumenthal. There were pension funds that lost money in 
Amaranth. Indeed, I believe one in California lost about $87 
million, the pension funds of one of the cities in California.
    And as you know also, Amaranth involved use of the 
electronic trading issues through the intercontinental exchange 
that right now is not subject to the kind of disclosure 
requirements that NYMEX is. So that is another area where hedge 
funds are involved in practices where more disclosure should be 
required by--
    Chairman Specter. Were small investors involved in Amaranth 
as well?
    Mr. Blumenthal. I know some of them personally. Amaranth 
was and continues to be a Connecticut hedge fund. I think it is 
now non-operational, but many smaller investors in my own 
community, in Greenwich-Stamford, Connecticut, generally, were 
involved in Amaranth, as they were involved in Bayou.
    Chairman Specter. Do you have any idea of how much they 
lost?
    Mr. Blumenthal. Well, the total losses probably were in the 
range of $6 billion out of the $9 billion that Amaranth had 
because $6 billion was approximately the amount that was 
invested in natural gas futures. But some of these were losses 
of life savings and some on the part of people who couldn't 
afford to lose them.
    Chairman Specter. And when you talk about small investors, 
how do you define ``small''?
    Mr. Blumenthal. Well, a small investor would, in my view, 
be anyone who cannot afford to lose the amount invested, and in 
different communities it may be different amounts.
    Right now the million-dollar net worth threshold for an 
accredited investor in parts of Connecticut, New York, New 
Jersey, Pennsylvania, many areas of our country, is still a 
small investor, but many of the investors that I have in mind 
have net worths well below that $1 million.
    Chairman Specter. Mr. Tenpas, what is your evaluation of 
the adequacy of these so-called voluntary industry practices to 
safeguard against inappropriate practices by hedge funds?
    Mr. Tenpas. I think that is a little beyond the 
Department's ken. The President's Working Group on Financial 
Markets that is chaired by the Treasury Department includes the 
SEC, the Federal Reserve, and the CFTC is really the group that 
is looking at that, understands those markets and the way they 
work better than we do. And so I think I would have to defer to 
that group of folks to give you a sensible evaluation.
    Chairman Specter. Well, OK. Let's come back squarely within 
your so-called ken. On the parallel investigations by the SEC 
and the Department of Justice, you do favor a change in the law 
or a specification in the law to deal with the Federal court 
decisions which have stricken prosecutions on the ground that 
it was inappropriate to have parallel or coordination between 
the SEC and the Department of Justice?
    Mr. Tenpas. We would welcome, I think, some clarification. 
We think those cases were wrongly decided, so I would be 
reluctant to say that we think a change in the law is needed. 
There have been a couple of cases decided since the Stringer 
case that have rejected some of the language in Stringer and 
the Scrushy case. So I am not sure we need a change, but we 
need some clarification that the view we have taken is, in 
fact, the correct view of--
    Chairman Specter. Clarification that you can have parallel 
investigations appropriately.
    Mr. Tenpas. Yes. I think clarification that the Department 
and the SEC or other similar regulatory agencies can 
communicate with each other about and coordinate their 
investigations for appropriate purposes.
    Chairman Specter. When you mention that we ought to await 
the decision by an appellate court, what is the status there? 
How long do we have to wait?
    Mr. Tenpas. It is still being briefed. Oral argument has 
not been held, so it would probably be, at best, sometime this 
spring, early summer. It is in the Ninth Circuit so it is a 
little hard for us to predict how long they would have it under 
advisement.
    Chairman Specter. So you think it might happen sometime 
next year.
    Mr. Tenpas. I think so.
    Chairman Specter. Congress has a pretty good record at 
waiting, even without a specific reason, but I think this is 
something we really ought to be acting on.
    Attorney General Blumenthal, you talk about protecting 
whistleblowers. I agree with you. It is not easy to come 
forward and to make an identification, but it is indispensable 
to have real law enforcement. You are a prosecutor. Mr. Tenpas 
was. We know from our common experience how hard it is to 
gather this information which is done behind closed doors and 
in secrecy.
    Do you think the current protections for whistleblowers are 
adequate?
    Mr. Blumenthal. Overall, I think not, Mr. Chairman. I think 
there needs to be a stronger shield, protection against 
retaliation, indirect as well as overt, and direct forms of 
revenge or retaliation.
    Often, as you know, they can be subtle, pernicious, but 
long-lasting on a person's career. We see it at the State 
level, obviously, which is the arena where I practice now. Just 
yesterday, as a matter of fact, my office produced a report 
that culminated a 13-month investigation of the Internal 
Affairs unit of our State Police that resulted from State 
Troopers themselves having the courage and conviction to come 
forward with complaints about a system that was in disarray.
    And we have protected those whistleblowers. We are able to 
do so as best we can at the State level. But we need the kind 
of rewards, I think, and incentives that your draft bill 
proposes.
    As well as the shield, we need the kind of incentives that 
will provide a financial security--maybe the best way to 
characterize it--for people who come forward and take the risk 
that government may not be able to protect them.
    We saw it in the tobacco cases where we were guided 
initially by whistleblowers, now well known, but, arguably, the 
States would not have had the evidence and the guidance that we 
needed there without whistleblowers from the tobacco industry. 
Again and again what we see is not just disclosure of 
information, but also providing a road map.
    As you know from your prosecutorial days, and I am sure Mr. 
Tenpas does as well, one of the classic tactics of potential 
defendants is to deluge prosecutors with documents. Having a 
road map, having someone to guide that effort, to pinpoint the 
documents that are critical, often is invaluable. And, again, 
whistleblowers provide that service.
    So I apologize for the long-winded answer, but I believe 
that a greater measure of protection, as you have sought, as 
the Committee is seeking to do in this bill, is absolutely 
vital.
    Chairman Specter. That is not long-winded at all, Mr. 
Blumenthal, by Senate standards.
    [Laughter.]
    Chairman Specter. Well, thank you very much, Mr. Tenpas and 
Attorney General Blumenthal. We very much appreciate your 
testimony.
    Mr. Tenpas, if you would followup on those outstanding 
issues, and, Attorney General Blumenthal, keep going.
    Mr. Blumenthal. Thank you very much, Mr. Chairman.
    Mr. Tenpas. Thank you.
    Chairman Specter. Thank you very much.
    We will now turn to Mr. Aguirre, Mr. Stachnik, Mr. Hanson, 
Mr. Kreitman, Mr. Berger, Mr. Ribelin, and Ms. Thomsen.
    At this point I will put into the record a lengthy analysis 
of six pages by Mr. Mark Kasowitz of the Alliance for 
Investment Transparency, dated September 4, 2006, in support of 
the draft legislation.
    [The prepared analysis of Mr. Kasowitz appears as a 
submission for the record.]
    Will all of you please stand for the administration of the 
Oath? Raise your right hands. Do each of you solemnly swear 
that the testimony you will give before this Committee will be 
the truth, the whole truth, and nothing but the truth, subject 
to the laws on perjury?
    Mr. Aguirre. I do.
    Mr. Stachnik. I do.
    Mr. Hanson. I do.
    Mr. Kreitman. I do.
    Mr. Berger. I do.
    Mr. Ribelin. I do.
    Ms. Thomsen. I do.
    Chairman Specter. May the record show that each of the 
witnesses has said ``I do.''
    Mr. Aguirre, thank you for returning to testify before this 
Committee. Mr. Aguirre is a former senior counsel with the 
Division of Enforcement in the Securities and Exchange 
Commission, has nearly 40 years of litigation experience, 
including the areas of construction disputes, environmental 
regulations, securities litigation, and criminal defense; 
published many scholarly legal articles, including one arising 
from litigation from the Enron debacle and the application of 
Section 10(b) of the Securities Act for fraud; bachelor's 
degree in politics and a law degree from the University of 
California at Berkeley; a master of fine arts from UCLA and a 
master of law from Georgetown University Law Center.
    Thank you for being with us, Mr. Aguirre, and we look 
forward to your testimony again.

 STATEMENT OF GARY J. AGUIRRE, FORMER INVESTIGATOR, SECURITIES 
           AND EXCHANGE COMMISSION, WASHINGTON, D.C.

    Mr. Aguirre. Thank you, Senator Specter. I would like to 
express my gratitude for the time that your staff has taken to 
look into this matter and your leadership in looking into this 
matter.
    Before I touch on the Pequot case, I would like to speak 
briefly about the SEC's track record on the subject you are 
looking at. The SEC has brought--and I am talking, of course, 
about insider trading investigations of hedge funds, and 
specifically those that result--
    Chairman Specter. Mr. Aguirre, is your microphone on?
    Mr. Aguirre. I will move a little closer. Specifically 
about SEC cases that have been filed against hedge funds for 
insider trading. It is a short record. There are six cases. 
Three of those cases are PIPEs cases. PIPE transactions are a 
filament, a tiny, tiny, thin aspect of our capital markets. 
Last year they were $20 billion. Compare that, for example, 
with our merger and acquisitions market, which is $1.46 
trillion. Half the focus was on this.
    On all the other types of insider trading, whatever it is--
mergers, acquisitions, tips before earnings, tips before 
drugs--everything else, there are three cases. The total 
recovery in those three cases is $110,000. That is the track 
record of the SEC in pursuing insider trading with the 
exception of the PIPEs cases, and in the PIPEs cases they 
recovered $25 million.
    Now, those three cases deserve a little more comment. Two 
of them involved tiny, tiny hedge funds, and the third, it took 
them 5 years to file a case.
    Now, I would like to talk for a moment about the Pequot 
case, and in particular on the date of June 14th. On that date, 
I was meeting with Mr. Hanson and Mr. Kreitman. I was reviewing 
for them the status of the case at that moment. I had reviewed 
the status of the evidence involving Pequot itself, Mr. 
Samberg, and as well as Mr. Mack. That day, they authorized me 
to meet the next day with the FBI and the U.S. Attorney and 
present the same facts to initiate a criminal investigation.
    Now, that is a serious matter. That is why I was so shocked 
when, 9 days later, they would not permit the issuance of an 
administrative subpoena for Mr. Mack's testimony. Of course, 
something had changed during those 9 days.
    On June 23rd, the Wall Street Journal announced that Mr. 
Mack would be a candidate as the CEO for Morgan Stanley. On 
June 22nd or 23rd, Mr. Hanson explained to me that I could not 
issue that subpoena for Mr. Mack for one reason, and he gave me 
only one reason, and that reason was his powerful political 
contacts.
    Chairman Specter. Mr. Hanson told you that?
    Mr. Aguirre. Face to face, twice that week.
    Now, that event was followed very quickly by a phone call 
from Morgan Stanley in which I was told by Morgan Stanley's 
compliance officer, ``We've got a problem with Mr. Mack if you 
guys are going to go after him.''
    That investigation vanished in a week, and in that same 7 
days, Mr. Mack went from a candidate for CEO to CEO. The rest 
of my time I continued minding the evidence against Mr. Mack. I 
continued presenting that evidence. And every time I presented 
it, the bar went up another notch and the bar went up another 
notch. And, finally, it was a 9-foot bar.
    I would like to say just a few words about my evaluations. 
They were touched on by Senator Grassley, the remarkable way I 
had a re-evaluation out of nowhere. I read this morning the 
testimony that has come in from the SEC and the attacks. I have 
not seen a single piece of paper backing anything that they 
have said through my history with the SEC, and I have been 
trying to get them through FOIA and Privacy Acts.
    Thank you. I think my time has run out.
    [The prepared statement of Mr. Aguirre appears as a 
submission for the record.]
    Chairman Specter. Thank you, Mr. Aguirre.
    Mr. Hanson, I am going to go to you out of order so that 
you will have a prompt opportunity to respond to Mr. Aguirre's 
statement that he and you face to face had an exchange where, 
according to Mr. Aguirre's testimony, you told him not to 
proceed with an administrative subpoena as to Mr. Mack because, 
as Mr. Aguirre puts it, of his powerful political contacts. The 
floor is yours, Mr. Hanson.

   STATEMENT OF ROBERT B. HANSON, BRANCH CHIEF, DIVISION OF 
 ENFORCEMENT, SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, 
                              D.C.

    Mr. Hanson. Thank you, Senator Specter. I did not say that 
to Mr. Aguirre, as he states. I have no recollection of making 
that statement. In fact, I had no knowledge at all about Mr. 
Mack's political connections at that point.
    I certainly knew that Mr. Mack was a very high profile 
individual, but I had no idea until I read in the New York 
Times recently about Mr. Mack's political connections. I didn't 
even know what a Ranger was until I read that in the New York 
Times and looked it up. So I had no idea what that was at the 
time Mr. Aguirre alleges that I told him that.
    Chairman Specter. You may proceed with your testimony 
generally, Mr. Hanson, as you choose.
    Mr. Hanson. Thank you, Senator Specter. Thank you for the 
opportunity to testify today and to respond to false 
allegations of abuse of authority that have been advanced by a 
former staff attorney of the United States Securities and 
Exchange Commission. I appreciate the opportunity to set the 
record straight on the matter about which Mr. Aguirre testified 
to this Committee last summer.
    I have spent my entire legal career in Federal Government 
service, currently a branch chief at the SEC, where I have 
worked for approximately 8\1/2\ years. Every day I get the 
chance to work with motivated professionals dedicated to the 
agency's mission. It is a great honor and privilege to do so.
    Let me state that in my experience the Division of 
Enforcement of the SEC has never considered an individual's 
political connections in deciding whether to take his or her 
testimony. No one has ever asked or suggested that I refrain 
from taking a person's testimony because of his or her 
political connections. In conducting and supervising 
investigations, I have followed the evidence wherever it leads, 
even if the trail points to a prominent executive or a public 
figure.
    In the investigation concerning the hedge fund Pequot 
Capital, I have no reason whatsoever to believe any outside 
source ever attempted to influence a decision on taking the 
testimony of anyone.
    I supervised Mr. Aguirre before he was terminated. I found 
him to be highly energetic, but his conduct was erratic and 
unprofessional. It was extremely difficult to communicate with 
Mr. Aguirre, and miscommunications were common.
    Information that Mr. Aguirre presented as fact often turned 
out to be mere speculation, and he omitted information that did 
not support his hypothesis. He did the same thing in his 
written testimony he provided today.
    Failing to bring to the Committee's attention the 
inconvenient fact that CS First Boston counsel had told Mr. 
Aguirre that the individual who Mr. Mack met with before Mr. 
Mack joined CS First Boston did not even have the information 
that Mr. Aguirre had relied on to support his theory that Mr. 
Mack had received the information from CS First Boston before 
joining the firm.
    One by one, Mr. Aguirre alienated the other staff attorneys 
and the assigned trial attorney on the case, treating them with 
open hostility for no valid reason. At least twice, Mr. Aguirre 
angrily stormed out of the office during the workday after 
disagreements with other attorneys in the spring of 2005.
    Both times he said he was going to think about what he was 
going to do, which I understood him to mean that he was 
planning to leave the Commission. He formally tendered his 
resignation in June 2005, but later withdrew that resignation. 
I learned that he had withdrawn his resignation through the 
grapevine rather than from him directly, even though I was 
responsible for staffing the case.
    Mr. Aguirre then said he would be willing to work to 
complete the investigation but would not document his findings, 
which was essential to completing the investigation. It became 
apparent that Mr. Aguirre was a significant risk to leave at a 
moment's notice, regardless of the impact such action would 
have on the investigation. His erratic behavior and the 
negative impact it had on the other attorneys on the case, on 
the investigation compelled me to strongly urge that Mr. 
Aguirre be terminated before his probationary period ended.
    I was not the first supervisor to recommend that Mr. 
Aguirre be terminated. Mr. Aguirre's public assertion that the 
Pequot investigation was halted is utterly false. After he was 
terminated, the Division of Enforcement continued the 
investigation unabated, devoting hundreds of hours to the 
matter.
    After Mr. Aguirre's termination, investigative staff took 
testimony from or interviewed more than a dozen individuals, 
made numerous formal and informal document requests, reviewed 
and analyzed thousands of documents, and participated in two 
proffer sessions with the FBI and the Office of the U.S. 
Attorney for the Southern District of New York. No shrinking 
violets.
    Ultimately, after a thorough investigation, we closed the 
matter after finding insufficient evidence to warrant bringing 
an enforcement action.
    While at the SEC, every investigation I have worked on has 
been conducted with fairness, diligence, and integrity. We did 
so in the Pequot investigation.
    Thank you. I would be glad to answer any questions you may 
have.
    [The prepared statement of Mr. Hanson appears as a 
submission for the record.]
    Chairman Specter. Thank you, Mr. Hanson. I want to make it 
a part of the record as to your background. You are Branch 
Director in the SEC's Division of Enforcement, and you were Mr. 
Aguirre's immediate supervisor at the time of his termination.
    Prior to joining Enforcement, you were a staff attorney 
with the SEC's Office of Compliance and previously had served 
with IRS in the Office of Chief Counsel; a graduate of the 
University of Delaware and the University of Maryland School of 
Law.
    Mr. Hanson, let me bring up at this point as a matter of 
sequence a couple of memoranda, one from you to Mr. Aguirre 
dated August 4th, or an e-mail, which you have involved with 
other comments this statement, ``Mack's counsel will have 
`juice' as I described it last night, meaning that they may 
reach out to Paul and Linda and possibly others.''
    Do you recollect writing that statement?
    Mr. Hanson. I do.
    Chairman Specter. What did you mean by ``juice''?
    Mr. Hanson. Well, as I explained in my written testimony, 
although I had no reason to know who would represent Mr. Mack 
if he was called to testify, I knew he would retain experienced 
SEC counsel, who would likely, as is not uncommon, directly 
contact my superiors about the testimony.
    Chairman Specter. A second written communications was from 
you to Mr. Kreitman dated August 24th, and the second paragraph 
says, ``Most importantly, the political clout I mentioned to 
you was a reason to keep Paul, and possibly Linda, in the loop 
of the testimony.
    As far as I know, politics are never involved in 
determining whether to take someone's testimony. I've not seen 
it done at the agency. It does make sense, though, to have all 
your ducks in a row before approaching a significant witness 
like Mack; hence, the reason to try to figure out a number of 
things about him before scheduling him up, not the least of 
which is whether he knew about the deal.''
    Was there some special precaution or preparation you took 
as to Mr. Mack within the context that, as I have quoted here 
your statement, politics are never involved in determining 
whether to take someone's testimony? Was there any special 
precaution taken as to Mr. Mack?
    Mr. Hanson. The precaution I did want to take was I wanted 
to see what information we could learn about Mr. Mack before 
trying to take his testimony. And as I do mention in that e-
mail, politics have never been involved in deciding whether to 
take someone's testimony.
    Chairman Specter. We are going to go now to Ms. Linda 
Thomsen, who is the Director of the Securities and Exchange 
Commission's Division of Enforcement, joined the Securities and 
Exchange Commission in 1995; prior to that served as Assistant 
U.S. Attorney for the District of Maryland; bachelor's degree 
from Smith and a law degree from Harvard University.
    I am going to have to take you out of sequence, Ms. 
Thomsen, at this time because I think that there ought to be as 
early an opportunity as possible to respond to Mr. Aguirre, and 
then we will have further questioning. But you may proceed at 
this time.

    STATEMENT OF LINDA C. THOMSEN, DIRECTOR OF ENFORCEMENT, 
      SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C.

    Ms. Thomsen. Chairman Specter, thank you for inviting me to 
testify today. I have submitted written testimony and ask that 
it be made part of the record.
    Chairman Specter. Your statement will be made a part of the 
record.
    Ms. Thomsen. Thank you, Mr. Chairman.
    I would like to start briefly on some of the broader issues 
that you raised in the first panel, and as that earlier panel 
discussed and, indeed, as Mr. Tenpas and I discussed with the 
Committee earlier this fall, the pursuit of illegal insider 
trading is an important and challenging part of the overall 
enforcement of the Federal securities laws. The same is true 
for illegal activity by hedge funds, important and challenging.
    We at the SEC are committed to pursuing enforcement actions 
related to insider trading and to hedge funds. Indeed, insider 
trading cases typically constitute 8 to 12 percent of our filed 
cases in any given fiscal year. As to hedge funds, and 
purported hedge funds, they are a growing focus of our efforts.
    Just to illustrate, in fiscal year 1999 we had one case 
involving a hedge fund. During the last three fiscal years, in 
each year we have brought in excess of 20 cases, and since that 
time, since 1999, over 100.
    The cases against hedge funds fall into two general 
categories: abuses that are directed at the investors in the 
funds, and abuses that are directed more at the market, such as 
insider trading or market manipulation. To date this fiscal 
year, which has just started, we have already brought two cases 
involved hedge funds. We very much appreciate your support of 
this important work.
    My written testimonies both for today and from September go 
into greater detail on some of the programmatic issues, but I 
think it is important, in light of your expressed concern about 
the investigation of Pequot, to address it here very briefly.
    As you indicated, a former SEC attorney has alleged that 
the investigation was impeded and he was terminated because he 
sought to take the testimony of a prominent individual. 
Speaking for the Division of Enforcement, these allegations are 
simply not true.
    After an unhappy probationary period of employment, the 
former employee was terminated on September 1, 2005, because of 
his inability to work effectively with other staff and his 
unwillingness to operate within the Securities and Exchange 
Commission process.
    As discussed in the SEC's termination letter, which is 
attached to my testimony, he had continued personality 
conflicts with other staff, he resisted standard supervision, 
and he ignored the SEC's chain of command.
    Despite these problems, the SEC attempted to accommodate 
him. He was, at his request, transferred from his original 
supervisor to a supervisor he selected and about whom he now 
bitterly complains.
    He also requested and received official time to pursue an 
unsuccessful age discrimination claim against the SEC for 
failing to hire him on 22 prior occasions. The EEOC denied 
those claims in a thorough written opinion, which is also 
attached to my testimony.
    Regarding the substance of his work, among other things he 
issued, without his supervisor's review or approval, subpoenas 
that violated Federal privacy law, which were withdrawn after 
his supervisor's learned of them.
    But for the supervisor's corrective actions, the former 
employee's work product could have been extremely damaging to 
the SEC, and his continued resistance to supervision created a 
substantial risk of future error. After the SEC had expended 
considerable effort to make the employment relationship work, 
we decided not to extend his employment beyond the 1-year 
probationary period.
    Moving to the investigation of Pequot, the potential 
insider trading by Pequot, as well as other potential 
securities law violations, were thoroughly investigated. The 
investigation was conducted in large part by staff other than 
the former employee and was continued long after he left.
    Ultimately, we did not find sufficient evidence to support 
an enforcement action. Accordingly, our investigation was 
closed for lack of evidence. The closing memorandum summarizes 
the many hours of hard work by the SEC staff that did this 
investigation, and it too is attached to my testimony.
    Finally, and perhaps most importantly, Mr. Chairman, the 
three supervisors working on the Pequot investigation 
collectively have decades of experience and have brought some 
of our toughest cases. They are also, each of them, smart, 
dedicated, and honorable.
    Their decisions in Pequot were not influenced by who any 
potential witnesses were but, rather, by the facts and the 
evidence. This is consistent with the finest traditions of our 
agency.
    We follow the facts, and if those facts take us to John or 
Jane Doe, or some more famous John or Jane, so be it. We have 
gathered evidence from and about, and in some instances we have 
sued, captains of industry, Presidential Cabinet members, 
Members of Congress, and celebrities, as well as thousands of 
people who are less well known. Indeed, a long list of 
prominent and not-so-prominent individuals would undoubtedly 
testify that the Enforcement Division does not pull its 
punches.
    I want to assure you and the Committee that we are 
passionate about our work and we will pursue it with vigor, 
skill, and fairness. And I, too, would be happy to take any 
questions.
    [The prepared statement of Ms. Thomsen appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Ms. Thomsen.
    We turn now to Mr. Mark Kreitman, Assistant Director, 
Division of Enforcement, of the SEC, supervises a 15-lawyer 
investigative group and was one of Mr. Aguirre's superiors 
during his time at the SEC. Previously, Mr. Kreitman served as 
Assistant Chief Litigation Counsel for the Division of 
Enforcement, and prior to joining the SEC was a partner at Shea 
& Gould; holds an undergraduate degree from Yale and a law 
degree from Harvard.
    We appreciate your being with us, Mr. Kreitman, and look 
forward to your testimony.

  STATEMENT OF MARK KREITMAN, ASSISTANT DIRECTOR, DIVISION OF 
 ENFORCEMENT, SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, 
                              D.C.

    Mr. Kreitman. Thank you very much, Chairman Specter. I have 
also prepared written testimony, which I request be made a part 
of the record.
    Chairman Specter. It will be made a part of the record.
    Mr. Kreitman. Thank you for the opportunity to testify. The 
concern raised in this inquiry was the possibility that 
political influence may have distorted the Commission process.
    I can say categorically that no such thing affected the 
conduct of the Pequot investigation, Mr. Aguirre's termination, 
or the decision not to take testimony from John Mack while Mr. 
Aguirre worked at the Commission.
    The Pequot investigation was pursued with vigor and 
professionalism after Mr. Aguirre departed. When all reasonable 
leads were exhausted, the relevant individuals questioned and 
documents examined, it was recently closed with no action 
taken.
    As you have indicated, I have been an Assistant Director 
and before that an Assistant Chief Litigation Counsel--trial 
lawyer--with the Division of Enforcement for 19 years and have 
received a variety of awards and commendations.
    I have investigated or tried cases against a department 
head at a major New York law firm, a president of a Beverly 
Hills bank, the son of a prominent local banker, First Jersey 
principal Robert Brennan, and numerous Wall Street luminaries.
    I brought one of the cases, insider trading cases, against 
a major hedge fund within the past year and a half, and I 
recommended successfully the largest whistleblower award that 
the Commission has offered. In 26 years of public service, I 
have played a role in recovering nearly $1 billion for 
investors and for the government.
    Mr. Aguirre was a student of mine at Georgetown, where I 
teach as an adjunct and have since 1999. I advised him and 
supervised his master's thesis, which, as you indicated, was 
published in a number of journals. We became friends and 
socialized together, and that, Senator, has made this entire 
episode particularly painful for me and for my wife.
    When Mr. Aguirre graduated from Georgetown, he had not 
practiced law for a number of years. He had no experience in 
enforcement investigation. He was unfamiliar with a closely 
supervised working environment like the Commission, where 
investigative zeal must be tempered by a respect for the rights 
and legitimate interests of citizens and where collegiality and 
mutual respect is the hallmark.
    Mr. Aguirre was a hard worker but, unfortunately, treated 
his colleagues who questioned him or his methods with 
disrespect, bordering on contempt. He was unable to fairly and 
impartially balance evidence against his preconceived 
conclusions or articulate his thinking in a linear fashion. He 
viewed all supervision, direction, even inquiry concerning his 
work as unwarranted intrusion.
    Beginning in June 2005, he came to believe that John Mack 
tipped Pequot about the GE/Heller acquisition. He heatedly 
insisted that we subpoena Mr. Mack before he had evidence that 
Mr. Mack had access to inside information or indeed, any 
potentially inculpatory evidence with which to confront Mr. 
Mack.
    His supervisors, with, as Ms. Thomsen has indicated, more 
than 40 years combined Commission experience, instructed him of 
the need for proper foundation to invoke compulsory process and 
that premature testimony would likely be fruitless because Mr. 
Mack could simply deny any illegal activity or any connection 
to the suspicious trading.
    Mr. Aguirre concluded that this proved a widespread 
conspiracy to thwart him and protect an individual no more 
significant or powerful than people from whom we take testimony 
every day--including during this same time period a former U.S. 
Senator and a former high-ranking White House official.
    Toward the end, Mr. Aguirre's behavior became increasingly 
unprofessional, irresponsible, and erratic. He threw what can 
only be fairly described as ``tantrums,'' storming down the 
halls in a furious crouch, abruptly leaving the office without 
leave, resigning at least twice, necessitating that, despite 
severely limited resources, we were required to double staff 
his investigation. Finally, as Mr. Hanson mentioned, he 
announced that he refused to write up his investigation in the 
required formal memorandum.
    Mr. Aguirre did receive a two-step increase effective 
shortly before his termination. That was for the rating period 
that ended 4 months earlier on April 30. He was a new employee. 
He worked a great many hours. I wanted to encourage and help 
him readjust after a troubled beginning in another group.
    His subsequent behavior, however, so far exceeded the 
bounds of acceptable professional conduct that it was incumbent 
upon me and his other supervisors to supplement and correct 
that overly generous evaluation, which we did on August 1, a 
month before Mr. Aguirre's termination.
    I would be happy to answer any questions, Senator.
    [The prepared statement of Mr. Kreitman appears as a 
submission for the record.]
    Chairman Specter. Thank you, Mr. Kreitman.
    Mr. Kreitman, in your written testimony you state that Mr. 
Aguirre's theory regarding John Mack as a potential tipper was 
a ``highly suspect and illogical conclusion.'' And yet I note 
on a written communication, a June 3, 2005, e-mail to Aguirre 
that, ``Mack is another bad guy (in my view.)'' Was that your 
memorandum or was that a memorandum from Mr. Hanson?
    Mr. Kreitman. I do not believe those were my words, 
Senator.
    Chairman Specter. Not your words.
    Mr. Kreitman. I do not believe so.
    Chairman Specter. Were those your words, Mr. Hanson?
    Mr. Hanson. I believe they were.
    Chairman Specter. Why did you say that Mr. Mack was another 
bad guy?
    Mr. Hanson. I can't remember why I said that at that time. 
In hindsight, I was trying to encourage probably the 
investigation to wherever it led, and looking back in 
hindsight, those words are probably inappropriate. I have 
subsequently met Mr. Mack, and--
    Chairman Specter. You don't remember?
    Mr. Hanson. I am sorry?
    Chairman Specter. You do not remember?
    Mr. Hanson. I do not remember.
    Chairman Specter. Well, it was your written testimony that 
Mr. Aguirre's theory regarding John Mack as a potential tipper 
was a ``highly suspect and illogical conclusion.'' Do you still 
stand by that?
    Mr. Hanson. I do.
    Chairman Specter. But you can't explain why in a memo 
contemporaneously with these events back on June 3rd that you 
said Mack is ``another bad guy (in my view)''?
    Mr. Hanson. I can't remember why I sent the first e-mail. 
That is correct.
    Chairman Specter. Well, was Mack another bad guy, in your 
view?
    Mr. Hanson. At the time that I wrote that, I can't remember 
the basis for which I wrote it. But I certainly do not believe 
Mr. Mack is a bad guy.
    Chairman Specter. It did not come out of thin air, did it, 
Mr. Hanson? Is this your statement at that time?
    Mr. Hanson. It was.
    Chairman Specter. Your statement at that time.
    Mr. Hanson. That is correct.
    Chairman Specter. ``Bad guy.''
    Mr. Hanson. Correct.
    Chairman Specter. But you don't know any reason you had to 
say that.
    Mr. Hanson. Excuse me?
    Chairman Specter. You don't know any reason that you had to 
say that at that time?
    Mr. Hanson. The only thing I can think of, sitting here 
today, is that he had the reputation as Mack the Knife.
    Chairman Specter. Well, tell me a little bit more about the 
reputation. What was his reputation as Mack the Knife?
    Mr. Hanson. I think he had the reputation of--again, his 
name was--or his nickname was Mack the Knife because he had 
terminated a number of employees when he went to work at a 
couple of brokerage firms.
    Chairman Specter. Because Mr. Mack had terminated 
employees?
    Mr. Hanson. I believe that is correct.
    Chairman Specter. Anything else?
    Mr. Hanson. No.
    Chairman Specter. Well, terminating other employees, why 
would that lead you to call him a bad guy?
    Mr. Hanson. Again, Senator, I cannot remember why I wrote 
that e-mail, and thinking back today, I just can't come up with 
anything other than that.
    Chairman Specter. OK. We now turn to Mr. Paul Berger, 
partner at Debevoise & Plimpton; joined the Securities and 
Exchange Commission in 1992 and served as senior counsel, 
branch chief, Assistant Director, and Associate Director; and 
in his latter capacity, he oversaw Mr. Kreitman's unit.
    Prior to joining the SEC, he practiced law with Jenner & 
Block and was a staff attorney to the D.C. Circuit Court of 
Appeals; undergraduate degree with honors from American 
University, and a law degree from the Antioch School of Law.
    We appreciate your being with us, Mr. Berger, and the floor 
is yours.

    STATEMENT OF PAUL R. BERGER, FORMER ASSOCIATE DIRECTOR, 
 DIVISION OF ENFORCEMENT, SECURITIES AND EXCHANGE COMMISSION, 
                        WASHINGTON, D.C.

    Mr. Berger. Thank you, Chairman Specter. Good morning. 
Thank you for the invitation to appear before this Committee 
today and to respond to allegations of abuse of authority that 
have been made by a former staff lawyer with the United States 
Securities and Exchange Commission.
    I believe that accountability and oversight are healthy, 
and I commend you, Mr. Chairman, for taking these matters 
seriously. Indeed, I welcome the opportunity to respond to 
these allegations.
    For months now, allegations have circulated around town 
about this matter that the SEC and I have been unable to 
respond to because of our obligation to refrain from discussing 
confidential SEC investigations. Finally, we have a chance to 
put these allegations to rest, for they are completely false.
    As background, let me give you a sense of who I am. I spent 
14 years as a career law enforcement officer for the United 
States Securities and Exchange Commission, the last 6 of which 
as an Associate Director of Enforcement.
    As an Associate Director, I had anywhere from 150 to 200 
open investigations under my indirect supervision, as well as 
supervising current litigation. I authorized the opening of the 
Pequot investigation before Gary Aguirre joined the Commission 
because I believed then, as I do now, that hedge funds play an 
important role in our capital markets.
    And I, along with my colleagues, wanted to ensure that 
hedge funds conduct their affairs consistent with the laws 
prohibiting insider trading. When issues arose as to possible 
insider trading, I decided that, despite the considerable age 
of this particular matter, we should take a hard look.
    As I am sure you are aware, insider trading investigations 
are some of the most difficult cases to make. Establishing that 
someone had material nonpublic information and used that 
information to violate the anti-fraud provisions of the Federal 
securities laws is exceedingly difficult. In fact, it is more 
difficult than making a financial fraud case. Nevertheless, we 
opened the Pequot matter to look into concerns about possible 
insider trading.
    Now, there have been various allegations about that 
investigation that need to be addressed.
    First, I have heard that the SEC's investigation was 
stopped. Nothing could be further from the truth. Not only did 
the investigation continue for a year after Gary left, but we 
added two terrific staff lawyers to the case because, in part, 
we had become concerned with Gary's reliability since he had 
resigned on a number of occasions.
    Next--and this is particularly key--the major issue that we 
confronted in the investigation was not if we would take Mr. 
Mack's testimony but when we would take it. As I told Gary at 
least twice, the SEC is not and never has been afraid to take 
anyone's testimony. What we needed to do in the Pequot 
investigation was to get our ducks in a row. We needed to do 
our homework before we took Mr. Mack's testimony.
    The SEC supervisors made a judgment based on years of 
experience conducting SEC investigations, and particularly 
insider trading investigations, that the best time to take the 
testimony was at the conclusion of the investigation when all 
of the evidence had been assembled, all of the leads had been 
run down, and when the U.S. Attorney, who I had contacted in 
the first instance about this matter, had reviewed the evidence 
and completed their investigation. It was our professional 
judgment that the best and most efficient use of our resources 
was to conduct the investigation in this manner.
    Now, there are those who might say, well, what is the harm 
in taking the testimony when Gary wanted? Well, that would be 
an interesting standard for determining when to take testimony: 
as long as we do no harm. But that is not the standard.
    Now, experience shows that the most efficient and 
productive way to conduct an investigation is to take testimony 
when you have marshalled all of the facts necessary to take the 
witness. As I am sure you are aware as a former prosecutor, 
taking the testimony of witnesses multiple times creates a 
murky and sometimes unusable record.
    There has also been the suggestion that Mr. Mack was given 
special treatment when in 2005 lawyers not for Mr. Mack, but 
for Morgan Stanley's Board of Directors called to see if Mr. 
Mack had regulatory exposure.
    Both my Assistant Director and I told counsel that it was 
premature to draw any conclusions about the investigation. That 
was the right call. Why? Because it was consistent with SEC 
policy not to disclose confidential information about the 
investigation.
    I told counsel that we could not say whether Mr. Mack had 
any exposure or not, that we could not help Morgan Stanley with 
its decision; it would have been inappropriate for SEC staff to 
insert itself in a regulated entity's business decision. That 
was true since, at the time, as Gary admits, we didn't know 
whether Mr. Mack had violated the law.
    This investigation was conducted like every other 
investigation. Experienced supervisors made sure that we were 
balancing all of the facts and the evidentiary record and 
making the correct professional judgments. One can disagree 
with those professional judgments. That is fine. But it is 
beyond the pale when one turns those judgments into a 
conspiracy that ropes in SEC supervisors and the Commissioners 
themselves.
    I was a public servant who worked for 14 years on behalf of 
our Nation's investors and our capital markets. I tried to 
bring a passion for my work each and every day. Not a day 
passed that I did not ask whether a judgment that we made was 
the right thing to do. I believed then and I believe now that 
our judgments were sound and our investigations were exemplary.
    Thank you. I would be happy to answer any questions and ask 
that my testimony that was submitted be made part of the 
record.
    [The prepared statement of Mr. Berger appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Mr. Berger.
    We now turn to Mr. Eric Ribelin. He joined the SEC in 1988, 
currently Branch Chief in the Division of Enforcement's Office 
of Market Surveillance; previously served as a market 
surveillance specialist and senior market surveillance 
specialist; numerous honors at the SEC, including Chairman's 
Award for Supervisory Excellence in 2002 and Enforcement 
Division Director's Award in 2000; bachelor's and master's 
degree in economics from Eastern Illinois University.
    Thank you very much for your contribution here, Mr. 
Ribelin, and we look forward to your testimony.

   STATEMENT OF ERIC RIBELIN, BRANCH CHIEF, OFFICE OF MARKET 
 SURVEILLANCE, SECURITIES AND EXCHANGE COMMISSION, WASHINGTON 
                              D.C.

    Mr. Ribelin. Thank you, Mr. Chairman. I do not have any 
opening statements.
    Chairman Specter. Mr. Ribelin, there is a document which 
you sent to Mr. Hanson, a memorandum or communication from you 
to Mr. Hanson, dated September 9, 2005, re: Pequot saying this, 
``Bob, I have serious misgivings about many decisions made in 
this investigation. I don't know what all has driven the 
decisions. Something smells rotten, though. I am accusing you 
of nothing. You seem like a good guy, and you are certainly a 
good soldier. But I am nonplussed by issued big and small about 
the course of events going back to January. I really do need to 
contemplate my involvement going forward.''
    Mr. Ribelin, what did you mean by ``something smells 
rotten''?
    Mr. Ribelin. Mr. Chairman, we had an aggressive 
investigation into possible insider trading by Pequot and 
possible stock manipulation. Gary Aguirre is a tenacious 
investigator. He had an aggressive investigation. In my 
judgment, he was professional.
    We had a very worthy adversary, the best lawyers, the 
smartest lawyers who could be hired to defend, and they were 
extremely aggressive, and let me give a couple of examples. In 
a subpoena requesting the production of e-mail, we frequently 
didn't get production of those e-mails in a timely fashion.
    We took testimony of witnesses and had documents that had 
been subpoenaed to be associated with testimony of those 
witnesses, and documents would show up in the 11th hour prior 
to testimony or on the day of testimony. And it is 
extraordinarily difficult to conduct a testimonial session when 
we do not have documents.
    Repeatedly, Mr. Aguirre attempted to hold the feet to the 
fire of the attorneys on the other side to get e-mail 
production pursuant to subpoena, to get documents produced on 
time so that we could take testimony and do it appropriately.
    He continued to aggressively try to enforce the subpoena, 
if you will, and continued to go to his supervisors to get 
assistance from them that these subpoenas get enforced 
internally. And there was certainly a period of time when Mr. 
Kreitman and Mr. Hanson seemed to agree with Gary.
    But I can tell you that I was surprised from January of 
2005 that Paul Berger, who had a reputation for being an 
aggressive and smart attorney, did not seem as though he was 
aggressive in supporting the attempts of Mr. Aguirre to get 
subpoenaed documents on time and to get e-mail production so 
that we can conduct an investigation. That is one example of 
what I was referring to when I said ``something smells 
rotten.''
    That went through a very long period of time of the 
investigation where it was my sense that there was not the 
support for the aggressiveness and the tenacity of the 
investigator.
    There are other examples I can give you.
    Chairman Specter. Would you please do that?
    Mr. Ribelin. I can do that. As I said, for a very long 
period of time, we had a hard time getting e-mail production, 
and I can tell you that if you subpoena a document or subpoena 
e-mails and you don't get them, you are not going to be able to 
do the investigation. And so we continued to push.
    There was a period of time when a very significant, large 
portion of e-mails were put out of our ability to get a hold of 
and to examine. Part of the reason given was because these e-
mails may be privileged e-mails, communications between 
attorney and client.
    We thought certainly there was a possibility that some of 
those e-mails fell into that category, but there was a very 
large number of e-mails that we suspected fell outside of that 
category. And there was one point that an attorney was hired 
who had custody of some of those e-mails--I can't remember how 
many thousands they were. Mr. Aguirre was not allowed by Mr. 
Kreitman to speak to that attorney about trying to get 
production of e-mails. To this day I don't know why that is.
    And I can tell you that Mr. Mack had been the CEO of Morgan 
Stanley. He was being courted to become the CEO of CS First 
Boston. We did not have information that he had material 
nonpublic information as it related to the GE/Heller merger. 
That is for sure.
    It was Gary's theory--I agreed; I think other people 
supported the idea--that it wasn't unlikely, it was certainly 
possible that he could have gotten access to the information 
based on the fact he had been the former CEO of Morgan Stanley 
and he was being courted at the time by CS First Boston of the 
trades engaged in by Pequot.
    After the word came down that the testimony of John Mack 
was not going to be taken, I had a conversation within a week 
or so of that with Bob Hanson, and Bob Hanson said to me that 
because Mr. Mack was a prominent person or because he had 
connections--I don't remember exactly how he put it--that we 
would have to be careful about taking his testimony, we would 
have to, my impression is, move maybe more carefully than we 
would if it was somebody other than somebody of prominence. And 
I said, ``Well, Bob, if that is the case or not, just call him 
up on the phone instead of bringing him in for testimony and 
ask a couple of basic questions.''
    And this is something, by the way, that Gary proposed, Gary 
Aguirre proposed a couple of times. Mr. Hanson didn't respond 
to me.
    And then finally, of course, Gary Aguirre was fired when he 
was on vacation. I was stunned. I was outraged. And the e-mail 
that you just referred to was soon after these events.
    Chairman Specter. Mr. Hanson, do you recall the comment 
that Mr. Ribelin has testified to, that you called Mr. Mack a 
``prominent person'' and then suggested that there would have 
to be treatment of him a little different?
    Mr. Hanson. I certainly felt he was a prominent person and 
I wanted to, as I have said to Mr. Aguirre and Mr. Ribelin, 
make sure we had our ducks in a row before taking Mr. Mack's 
testimony. And what I meant by that was, let us figure out what 
we can about whether he had the information before taking his 
testimony.
    Chairman Specter. Well, what would you be looking for as to 
what information that he would have had?
    Mr. Hanson. Whether he had the information regarding the 
deal, whether he had the inside information. I mean, there are 
hundreds of suspects or possible witnesses we could take the 
testimony from, almost an endless number of them.
    One of the things you want to try to look at as a criterion 
is whether or not they have access to the information. These 
merger and acquisition deals are highly sensitive matters 
within investment banking firms and they do not give that 
information out willy nilly.
    Chairman Specter. Well, it is not a matter of who else has 
access. It is a question of whether Mr. Mack would have access. 
And is it not true that, in his position with Credit Suisse, 
that he did have information about the prospective merger 
between GE and Heller in the July of 2001 timeframe?
    Mr. Hanson. After he joined Credit Suisse First Boston, it 
is certainly entirely likely that he would have had that 
information, but prior to that time, no. That is the trading 
period we were looking at, prior to that time.
    Chairman Specter. How about that, Mr. Aguirre? What time 
period was in question?
    Mr. Aguirre. The timeframe in question was from July 2 
through July 25. There were three dramatic trade moves by Mr. 
Samberg during that time. July 2, he opened the trading. July 9 
to 10, he went from 15,000 shares to 450,000 shares, in terms 
of what he was trying to buy. Then on September 25, he shorted.
    Now, that fit perfectly with the timing of Mr. Mack. Mr. 
Mack, according to Mr. Padalino, who was CSFB's attorney, told 
me that Mr. Mack had met with the CSFB people on approximately 
June 28 or June 29.
    Chairman Specter. So Mr. Mack had met with people who had 
the insider information prior to the July timeframe you 
testified about?
    Mr. Aguirre. Well, he met with CSFB. I was told he met with 
CSFB people at that time on June 28. Now, that is coming from 
the lawyer on the other side. Of course, I would want to verify 
that and talk to Mr. Mack: who exactly did you meet with?
    Chairman Specter. But that would have required questioning 
Mr. Mack.
    Mr. Aguirre. That would require it.
    Chairman Specter. But there was that contact in late June, 
June 28, as you testify.
    Mr. Aguirre. That was the first one.
    Chairman Specter. Let me finish the question.
    Mr. Aguirre. Sorry, sir.
    Chairman Specter. Where Mr. Mack would have had access to 
the inside information.
    Mr. Aguirre. Potential access to that information.
    Chairman Specter. Well, how about it, Mr. Hanson?
    Would that not establish the necessary predicate for 
questioning Mr. Mack?
    Mr. Hanson. Mr. Aguirre believed that Mr. Mack may have 
gotten the information from--I think one of his hypotheses was 
that he may have gotten it as part of a courting process with 
CS First Boston. It seemed highly unlikely that CS First 
Boston, in courting Mr. Mack, would tell him confidential, 
nonpublic information about a deal in their courting process.
    Not only that, but Mr. Aguirre was told by CS First Boston 
counsel--and this is the part that he excludes from his 
testimony to the Senate--that the person that Mr. Mack met with 
did not have the information.
    Chairman Specter. Well, what other information did you have 
about Mr. Mack's potential involvement when you finally did 
take his deposition, 5 days after the statute of limitations 
expired?
    Mr. Hanson. When we finally took Mr. Mack's testimony, 
subsequent to Mr. Aguirre's termination, we had actually gone 
to CS First Boston, subpoenaed their records to see whether or 
not the people that Mr. Mack had met with actually had the 
information. We first did that.
    Chairman Specter. And did you find they did have the 
information?
    Mr. Hanson. We did not.
    Chairman Specter. Why did you wait so long to subpoena 
those records?
    Mr. Hanson. We subpoenaed them September 1, the day that 
Mr. Aguirre was terminated, so there was no time delay at all.
    Chairman Specter. Why was Mr. Mack's deposition taken so 
long after that?
    Mr. Hanson. I am getting there. We subpoenaed CS First 
Boston records. We did an extensive e-mail review of Mr. Mack's 
records. We found additional exculpatory evidence that sort of 
suggested that the likelihood of Mr. Mack being the tipper was 
minuscule.
    We turned our attention and our focus to another 
transaction that Pequot was engaged in in approximately 
November of 2005. We followed that through until approximately 
June of 2005.
    At that point, we decided whether or not we were going to 
take additional individuals in connection----
    Chairman Specter. When was that?
    Mr. Hanson. I am sorry. 2006. Additional individuals in 
connection with the GE Heller transaction. At that point in 
time we took the testimony, before the statute of limitation 
expired, of the individuals at CS First Boston who potentially 
could have passed the information on to Mr. Mack.
    Chairman Specter. Why not take Mr. Mack's deposition before 
the statute of limitations expired?
    Mr. Hanson. We took the testimony of the two individuals 
who could have given Mr. Mack the tip or the information before 
the statute of limitations expired. If we found out from them 
that Mr. Mack had gotten the information or they had the 
potential of giving the information to Mack, we probably would 
have sought a tolling agreement. We sought tolling agreements 
from Pequot in March of 2006.
    Chairman Specter. Well, that is all very interesting about 
tolling agreements for somebody else. But you did not seek a 
tolling agreement for Mr. Mack.
    Mr. Hanson. I do not think we could have. We did not have 
the evidence that he had the information.
    Chairman Specter. All right. If the tolling agreement is 
out, I wonder why you mentioned it. If it was not relevant to 
Mr. Mack, why did you wait until after the statute of 
limitations had expired to take Mr. Mack's testimony?
    Mr. Hanson. We took Mr. Mack's testimony, as I described in 
my written statement, which I will ask to be made part of the 
record.
    Chairman Specter. But that does not tell us why you waited 
until after the statute of limitations had expired.
    Mr. Hanson. We got to it as soon as we could. The predicate 
to trying to figure out whether to take Mr. Mack's testimony or 
not was whether he had the information.
    We did not think, at the time that we took Mr. Mack's 
testimony, that there was any--there was virtually no 
likelihood, by the time we took Mr. Mack's testimony, that he 
had any information regarding the transaction that he could 
have passed on.
    Chairman Specter. So why did you take his testimony?
    Mr. Hanson. As I explained in my written statement, one 
consideration was the harm Mr. Aguirre had caused by taking 
this confidential, nonpublic investigation public for his own 
purposes, and the need to maintain public investor confidence 
in the work of the Division of Enforcement.
    Mr. Kreitman. Senator, I wonder whether I could clarify.
    Chairman Specter. You may, Mr. Kreitman, but in just a 
minute.
    Mr. Hanson, did the fact that this Committee held a hearing 
on June 28 have any effect on your moving ahead with Mr. Mack's 
deposition, or was that just entirely coincidental?
    Mr. Hanson. No. I think that, as I said, one consideration 
in taking Mr. Mack's testimony was the harm Mr. Aguirre had 
caused by taking the confidential, nonpublic investigation 
public.
    Chairman Specter. Mr. Kreitman, if you wanted to add 
something there, you are welcome to do so.
    Mr. Kreitman. Yes. Thank you, Senator. I would just like to 
clarify that the statute of limitations you referred to bars 
only penalty. It does not bar injunction. It does not bar other 
equitable remedies. It does not bar disgorgement of illegal 
profits or pre-judgment interest.
    Chairman Specter. But there is a significant limitation on 
what can be done after a statute of limitations expires. Is 
that not correct, Mr. Kreitman?
    Mr. Kreitman. That is correct, Senator. It does preclude 
imposition of penalties, financial penalties. That is the only 
impact.
    Chairman Specter. Mr. Kreitman, you heard what Mr. Ribelin 
said about the effort by Mr. Aguirre to acquire e-mails and 
your refusal to back him up on that. Do you want to comment on 
that?
    Mr. Kreitman. I do not think it is accurate. It is not 
uncommon for us to encounter push-back when we send out broad 
subpoenas. In this case, the subpoenas--and I believe there 
were more than 100 of them that Mr. Aguirre sent out--resulted 
in the production of, I believe, more than 19 million e-mails.
    I considered it so important to try to enforce these 
subpoenas--and it is unusual--I became personally involved in 
negotiation with Pequot's counsel. We do have available to us 
the remedy of subpoena enforcement in the District Courts, 
however, our experience is that that is neither a speedy, nor 
efficacious, remedy.
    But, short of bringing a subpoena enforcement action, I 
believe that we did everything that we could to facilitate and 
expedite production of documents in response to our subpoenas.
    Mr. Aguirre. Senator, may I just dip in my oar on that 
comment for just a moment?
    Chairman Specter. Yes, you may, Mr. Aguirre. Anybody who 
wants to comment as we proceed here, if you feel that something 
has been said which bears on your own participation in the 
matter, feel free to ask for recognition because the Committee 
wants to give you, as we always do, every opportunity to 
explain or comment as to anything which is said, because this 
hearing is filled with accusations, counter accusations, and 
denials. So if you have any denials to make, do not wait for me 
to ask.
    Go ahead, Mr. Aguirre.
    Mr. Aguirre. I think that Mr. Ribelin was referring to the 
prohibition of my speaking to attorneys who had control of the 
documents. Those two attorneys were a former Commissioner of 
the SEC, Irving Pollack, and another attorney by the name of 
Larry Storch. They were some of Mr. Kreitman's closest friends. 
Mr. Storch was a next-door-neighbor.
    Mr. Hanson pointed out to me, it was very troubling that 
they had been brought in exclusively to deal with documents 
which I thought were a critical aspect of that case, and Mr. 
Kreitman had given me an injunction not to talk to them about 
those critical documents. I think that was what Mr. Ribelin was 
speaking about.
    Let me just add a couple of points of why I suspected Mr. 
Mack. It was not just one contact on June 28 or June 29 that I 
had been told about by Mr. Padalino that came just before Mr. 
Mack talked with Mr. Samberg, which had come just before Mr. 
Samberg suddenly started trading ferociously the next trading 
day.
    But again, there was another contact by Mr. Mack on July 9 
with CSFB. The following day, Mr. Samberg's trades jumped from 
15,000 to 450,000 in terms of his order. Then once again on 
July 25, when Mr. Mack was already there and obviously had 
access to that information, it fit with the fact that Mr. Mack 
began shorting. So, there were those three connections.
    Then during the phone call on June 29 between Mr. Mack and 
Mr. Samberg, Mr. Mack got into a deal for $5 million. He got a 
piece of a deal that nearly tripled in 8 months. Nobody else 
got into that deal.
    Chairman Specter. What was that deal related to?
    Mr. Aguirre. It was called Fresh Start. There was an e-mail 
saying that he had been ``beating on Mr. Samberg's chops'' on 
June 20 to get into this deal. Then he talks with the CSFB 
people. He calls them on June 29. That night, he gets into this 
deal.
    If you look at the SEC filings, you will see that he put in 
his $5 million on October 15, and in late February of 2006 it 
was announced that that was paying about 3:1 on what he had put 
in. Nobody else got into those kinds of deals except Mr. Mack. 
Pequot got nothing out of that. So the question is, how come he 
got that favor at the same time that we think he gave the tip 
back going the other way?
    Chairman Specter. Mr. Hanson, any idea as to why Mr. Mack 
would be benefited, as Mr. Aguirre just described?
    Mr. Hanson. I am sorry. I did not follow your question.
    Chairman Specter. Mr. Aguirre has set forth a sequence of 
events. First of all, he mentioned three contacts--not one 
contact, three contacts--between Mr. Mack and people who had 
the inside information, and the contacts that Mr. Mack then had 
with Mr. Samberg.
    Were you aware of all of those matters? Mr. Hanson. Mr. 
Mack did not have contact with those three people during the 
timeframe that Mr. Aguirre alleges.
    Chairman Specter. Mr. Aguirre----
    Mr. Aguirre. Let me----
    Chairman Specter. Let me finish my question.
    Mr. Aguirre. I am sorry.
    Chairman Specter. Be specific about them so Mr. Hanson can 
comment on them, please.
    Mr. Aguirre. It is in my written testimony.
    Chairman Specter. Mr. Hanson, have you seen Mr. Aguirre's 
written testimony?
    Mr. Hanson. I looked at it last night for a brief period of 
time.
    Chairman Specter. Go ahead, Mr. Aguirre.
    Mr. Aguirre. The cases talk about looking at the trades and 
looking at the contacts. In this case, we saw three dramatic 
moves by Mr. Samberg: July 2, July 10, and July 25. We know 
that Mack met with CSFB just before the July 2 trade, and we 
know that he talked to Mr. Samberg just before that trade.
    Mr. Hanson. The first of those is inaccurate.
    Chairman Specter. Were you aware of that, Mr. Hanson?
    Mr. Hanson. Of the fact that he did not meet with the 
individual from CS First Boston, as Mr. Aguirre alleges.
    Chairman Specter. He did not?
    Mr. Hanson. He did not.
    Chairman Specter. Mr. Aguirre, how do you know that he did?
    Mr. Aguirre. Well, I was told by Patrick Padalino, who was 
the CSFB attorney, that that contact had occurred around the 
28th or the 29th. Now, I was relying on what the attorneys from 
CSFB were telling me, because I could not ask Mr. Mack.
    I, to this day, think that there were likely more contacts 
in exactly that timeframe involving Mr. Mack or CSFB. Perhaps 
Mr. Hanson can enlighten us whether Mr. Mack was in fact 
meeting with people from Credit Suisse or CSFB during this 
timeframe around June 27 or June 28. I was told of one version 
by Mr. Padalino, the attorney. I relied on that.
    Chairman Specter. Had you informed Mr. Hanson about what 
you had learned from Mr. Padalino?
    Mr. Aguirre. Absolutely. They were all in my e-mails.
    Chairman Specter. Is that true, Mr. Hanson?
    Mr. Hanson. He had informed me that Mr. Padalino had told 
him that Mr. Mack may have met with CS First Boston's CFO 
approximately 2 weeks before he joined Credit Suisse First 
Boston. That was not correct.
    Chairman Specter. What was not correct?
    Mr. Hanson. He did not meet with Mr. Mack during that 
timeframe.
    Chairman Specter. How do you know that?
    Mr. Hanson. I took the testimony of the CS First Boston 
CFO.
    Chairman Specter. You had contrary information at that 
time, Mr. Aguirre?
    Mr. Aguirre. Yes, I did, at that time. And I think, more 
importantly, the question is, what did Mr. Mack say about his 
meetings with Credit Suisse during the 27th, 28th, and 29th of 
June? He took his testimony. They should know.
    Chairman Specter. Was Mr. Mack questioned about that, Mr. 
Hanson?
    Mr. Hanson. Of course.
    Chairman Specter. And what did he say?
    Mr. Hanson. That the information that Mr. Aguirre alleged 
or speculated that Mr. Mack may have had was so far down in the 
weeds for Mr. Mack.
    Chairman Specter. So far down in the weeds?
    Mr. Hanson. It was so far removed from what he was doing 
with respect to negotiating with CS First Boston that it had no 
relevance to him. Not only that, but the people from CS First 
Boston that we talked to and received the e-mails from said 
that there is no possible way that they had the information, 
let alone passed it on to Mr. Mack.
    Chairman Specter. Mr. Hanson, back to the question which 
was pending a few minutes ago. Were you aware, as Mr. Aguirre 
has just testified, that Mr. Mack was afforded an investment 
opportunity by Mr. Samberg which enabled him to triple his 
investment?
    Mr. Hanson. I am aware that Mr. Mack was often an investor 
alongside Pequot in private investments.
    Chairman Specter. Now answer my question.
    Mr. Hanson. I guess I do not follow your question.
    Chairman Specter. My question, again, is were you aware, as 
Mr. Aguirre has testified, that Mr. Mack was offered an 
investment by Mr. Samberg which enabled him to triple his 
investment.
    Mr. Hanson. I do not know the specific facts for the 
investment that Mr. Aguirre is referring to. I know that one of 
the investments that Mr. Mack put money into with Pequot around 
that time, he lost all the money on. In another one, he doubled 
the money on.
    Chairman Specter. I am interested in what he lost money on. 
I am interested in a lot of things. But not today. What I want 
today is an answer, if you learned from Mr. Aguirre--and this 
is the last time I am going to ask it--that Mr. Samberg gave 
Mr. Mack an opportunity for an investment that he tripled.
    Mr. Hanson. I do not believe so. I think there was an 
investment. I am not sure, again, on the facts, which one 
doubled and which one he lost money on, which one he is 
referring to.
    Chairman Specter. Was there one that doubled?
    Mr. Hanson. I think so.
    Chairman Specter. Was that different from the one that 
tripled?
    Mr. Hanson. I am not aware of one that tripled.
    Chairman Specter. Did Mr. Aguirre tell you about one that 
tripled?
    Mr. Hanson. Not to my recollection.
    Chairman Specter. Mr. Hanson, let us come to the--
    Mr. Kreitman. Senator, I wonder whether I could respond to 
something both Mr. Ribelin and Mr. Aguirre have said.
    Chairman Specter. If you would like to respond, Mr. 
Kreitman, you have the floor.
    Mr. Kreitman. Thank you. Thank you, Senator. Just to 
correct the record, Mr. Storch is not, and has never been, a 
next-door-neighbor of mine. He is, however, a classmate from 
law school and a friend.
    Mr. Pollack is not only a former Commissioner, but the 
first Director of Enforcement of the Commission and an icon in 
this field, someone whom I regard as a mentor and a giant in 
the field.
    Nonetheless, as both Mr. Ribelin and Mr. Aguirre have 
testified here, I directed them not to speak to Mr. Pollack or 
Mr. Storch for a very simple reason, and that was that they did 
not represent any party in the investigation.
    As I advised Pequot's lawyers, I would be pleased to deal 
with them myself, and have my staff deal with them, if we were 
advised that they represented, and could therefore bind, 
Pequot.
    But if they were to occupy, as was proposed, an undefined, 
inchoate role in discovery production but could neither speak 
for nor bind any party to the investigation, then I was 
unprepared to have my staff deal with them.
    Chairman Specter. Mr. Aguirre, on page 21 of your testimony 
you have stated that ``SEC filings indicate Mack did extremely 
well on his $5 million investment'' and in Footnote 116, you 
say that ``the value of Mack's interest would have been 
approximately $16.43 million.''
    Would you amplify what went on here which is the basis for 
your saying that Mr. Mack had an investment that tripled in 
value?
    Mr. Aguirre. Yes. During the conversation on June 29, the 
night that we thought that Mack gave Samberg the tip, that 
night Mack got promised to get into Fresh Start. He had been 
trying to get in it for some time. There is an e-mail the next 
day of June 30 confirming the fact that he got into Fresh Start 
that night.
    Fresh Start is actually Salient Corporation. If you go to 
the SEC filings of Salient Corporation for the beginning of 
February, 2002--there is a series of SEC filings--you can track 
the history. He put the $5 million into Salient on October 15, 
2001. He got 3,333,000 shares. He got in on the same exact 
terms and conditions that Pequot got into in the same company.
    In February, the company was bought out by the Andrews 
Corporation for $467 million, but $82 million of that had to go 
to somebody else. The bottom line, after you sort that out, 
there was approximately $300 and some million. If you took the 
amount of the shares, the percentage of the shares that Mr. 
Mack got and simply did the mathematics, it came out to around 
$16 million.
    Chairman Specter. Mr. Hanson, before yielding to Senator 
Grassley, I want to take up the subject of the pay increases 
and the ratings of Mr. Aguirre.
    Is it not true that Mr. Aguirre received two favorable 
reviews in September of 2004 and then April of 2005?
    Mr. Hanson. Mr. Aguirre, I think, received sort of a 
``pass/fail'' rating in, probably, April or March, thereabouts, 
of 2005.
    Chairman Specter. Would you tell the Committee why there 
was a supplemental evaluation which led to Mr. Aguirre's 
termination?
    Mr. Hanson. Well, I would not say it led to Mr. Aguirre's 
termination. But we did draft a supplemental evaluation for Mr. 
Aguirre on August 1, 2005.
    Chairman Specter. Was it not highly unusual to have that 
kind of a supplemental evaluation?
    Mr. Hanson. I had never drafted one before, but I felt it 
was appropriate in Mr. Aguirre's case.
    Chairman Specter. I take that as a ``yes'' answer.
    Mr. Kreitman, is it not highly unusual to have that kind of 
a supplemental evaluation?
    Mr. Kreitman. Well, at that time, Senator, I had only 
participated in the evaluation process once before, and I had 
not done it in that case. So, I do not know, really, more 
generally than that.
    Chairman Specter. Well, have you ever seen a supplemental 
evaluation under analogous circumstances?
    Mr. Kreitman. Prior to becoming an assistant director, I 
had never seen any evaluations.
    Chairman Specter. Well, you were on the pay raise 
committee, were you not?
    Mr. Kreitman. No, I was not.
    Chairman Specter. Mr. Berger, was this not a highly unusual 
thing to have a supplemental evaluation?
    Mr. Berger. I think it was fairly rare, Mr. Chairman, to do 
a supplemental evaluation.
    Chairman Specter. Fairly rare? Happened one time in the 
past only?
    Mr. Berger. Oh, I could not say how many times it happened 
in the past.
    Chairman Specter. Do you know if it is happening at all?
    Mr. Berger. I think it has happened, yes.
    Chairman Specter. Do you know when it happened in the past?
    Mr. Berger. No, I do not. I am saying that I think it is 
rare. What I was going to say is that----
    Chairman Specter. Well, this is a pretty important point 
here. With the overtone that suddenly there is a change in 
evaluation, a supplemental evaluation, something the Committee 
is very concerned about, if this had been something that had 
been done in the past, would you not have checked that out 
before coming in to testify today?
    Mr. Berger. I am sorry. I am not at the SEC and I do not 
have access to that information.
    Chairman Specter. You are what?
    Mr. Berger. I am not at the SEC so I do not have access to 
the information.
    Chairman Specter. I know. But you are a witness in a matter 
which involved you on the evaluation of Mr. Aguirre and a 
supplemental evaluation.
    Mr. Aguirre, what happened in this situation?
    Mr. Aguirre. Well, of course, I did not know anything about 
any reevaluation until they fired me, but I have been able to 
track what has happened.
    Chairman Specter. You were never told you were being 
reevaluated?
    Mr. Aguirre. No. I had to dig that out. I had to press 
these guys to get the records, and they finally gave it to me 
in October.
    On June 1, I got the first evaluation ``acceptable on all 
grounds'', which qualified me for a merit pay increase. On June 
17, I submitted my evaluation. On June 29, Mr. Hanson forwarded 
the evaluation, saying my work was of high value, and made some 
very positive comments. For example, that I ``went the extra 
mile, and then some''.
    Now, I understand between June 29 and July 18, everyone, 
with the exception of Linda Thomsen, approved that merit pay 
increase. On July 18, the Compensation Committee met and 
approved it.
    Now, between July 18 and July 27, Linda Thomsen approved 
it. But on the evening of July 27 at 5:30, I sent Mr. Berger an 
e-mail for the first time saying to him, this investigation has 
been stopped because of Mack's political power.
    He did nothing in response to that e-mail. That is, he did 
not say, come on in, let us talk about it, let us get to the 
bottom of this. Two days later, he reevaluated me. That is the 
sequence.
    Chairman Specter. Mr. Hanson, there is a form here which is 
designated ``Merit Pay Supervisor Transmittal Form--Employee's 
Name: Gary Aguirre. Supervisor's Name: Robert Hanson''. Are you 
familiar with this document, or would you like to see it up 
close?
    Mr. Hanson. I am familiar with it.
    Chairman Specter. You are familiar with it. On June 29, 
2005, you checked off the category here, ``Made Contributions 
of High Quality''.
    Mr. Hanson. That is correct.
    Chairman Specter. Well, what was it that changed your view 
as to his qualifications?
    Mr. Hanson. As I indicated in my written statement, the 
evaluation prepared for Mr. Aguirre was based on his work for 
the 3-month period, from the date Mr. Aguirre joined my group 
through April 30, 2005.
    Chairman Specter. And Mr. Kreitman, are you familiar with a 
document dated June 1, 2005 concerning ``Performance Plan and 
Evaluation'' as to Mr. Aguirre?
    Mr. Kreitman. Yes, I am, Senator.
    Chairman Specter. You are familiar. Where you checked off 
``Knowledge of Field or Occupation: acceptable. Planning and 
organizing work: acceptable. Execution of Duties: acceptable. 
Communications: acceptable.''
    Mr. Kreitman. Yes, Senator.
    Chairman Specter. That was your evaluation of Mr. Aguirre 
on June 1 of 2005.
    Mr. Kreitman. Yes, it is.
    Chairman Specter. Why the change?
    Mr. Kreitman. Well, Senator, Mr. Aguirre was a probationary 
employee. If I had rated him ``unacceptable'' in any of those 
four critical performance evaluation standards, it would 
effectively have terminated his employment at that time.
    Chairman Specter. He ultimately was terminated.
    Mr. Kreitman. That is correct.
    Chairman Specter. If he is unacceptable, why should he not 
be terminated?
    Mr. Kreitman. He should be.
    Chairman Specter. If he is acceptable, why was he 
terminated?
    Mr. Kreitman. He was not acceptable at the time that he was 
terminated, Senator, at the end of his probationary period.
    Chairman Specter. Well, what was the change that moved from 
``Acceptable'' in all those categories to ``Unacceptable''? Is 
it not a curious coincidence, Mr. Kreitman, that at the time he 
is pursuing these matters which are not meeting with favor by 
Mr. Hanson, Mr. Kreitman, and Mr. Berger, that suddenly there 
is a reevaluation, highly unusual, and all of these 
qualifications where he is ``Acceptable'', and where Mr. Hanson 
says, his immediate supervisor, ``Made Contributions of High 
Quality''. Suddenly there is a change and he is fired?
    Mr. Kreitman. Senator, the only respect in which Mr. 
Aguirre's professional judgment received disfavor by any of his 
supervisors was, as Mr. Berger indicated, with respect to the 
timing of the testimony of Mr. Mack.
    However, it was Mr. Aguirre's behavior and conduct, the 
contemptuous way in which he treated his colleagues, the 
unprofessional way in which he dealt with opposing counsel, his 
refusal to accept any kind of directional supervision, that led 
to his termination.
    Chairman Specter. Well, he worked there for a long time. He 
got these very favorable ratings on June 29, and a favorable 
rating from you, ``Acceptable'', on June 1. Then on September 
1, 2 months later from the Hanson evaluation and 3 months later 
from your evaluation, suddenly he is fired.
    Mr. Kreitman. Well, Senator, he did not work there for a 
long time. He was a probationary employee. He worked in our 
group from February until September and, perhaps erroneously in 
retrospect, we were very generous with him. We wanted to 
encourage him. I had promised him that when he came to my group 
after having very serious difficulties in another assistant 
director group, that I would give him a fresh start.
    He worked an enormous number of hours with very great 
energy and diligence, therefore, in my judgment and in the 
judgment of his other supervisors, I believe, he made a highly 
valuable contribution.
    That is very different from the basis upon which he was 
terminated, which was his inability to work within a closely 
supervised, structured, and collegial environment.
    Chairman Specter. Senator Grassley?
    Senator Grassley. Before I ask questions, I would like to 
ask that a list of documents that I will hand to you now would 
be included in the record of today's hearing. Also then, before 
they are included, it would be necessary for your Committee and 
my Committee staffs to make appropriate redactions.
    Chairman Specter. Without objection they will be made a 
part of the record, as will all of the documents which have 
been referenced during the course of the testimony be made a 
part of the formal record.
    [The documents appear as submissions for the record.]
    Senator Grassley. Yesterday's written testimony was 
submitted by the witnesses for today's hearing. Mr. Hanson, in 
your testimony you discuss Mr. Aguirre's performance when he 
took the testimony of Arthur Samberg. You stated, ``It was 
reported to me that Mr. Aguirre behaved unprofessionally and 
was extremely disorganized during the testimony.''
    Mr. Hanson, were you present at any of the testimonies that 
Mr. Samberg gave?
    Mr. Hanson. I was.
    Senator Grassley. You were there?
    Mr. Hanson. Your question was, was I present at any of the 
testimonies that Mr. Samberg gave.
    Senator Grassley. Yes.
    Mr. Hanson. I was.
    Senator Grassley. You were there.
    Mr. Hanson. I think, just to clarify the record, I was not 
at the testimonies that Mr. Aguirre took of Mr. Samberg.
    Senator Grassley. All right.
    So you would have no direct knowledge of what took place at 
Mr. Aguirre's testimony of Mr. Samberg.
    Mr. Hanson. Other than reading the transcript, I would not 
have direct knowledge.
    Senator Grassley. All right.
    Hilton Foster, who I understand is an ex-Securities and 
Exchange Commission expert on insider trading cases, was there. 
He has over 30 years' of experience at the SEC and he trained 
new attorneys at the SEC.
    He testified in an interview with Committee investigators 
that ``did I think anything happened in there that was unusual 
or unprofessional? No.'' Foster continued, ``There was a 
portion there where I said, `this is dynamite stuff here.' 
Further, I remember being impressed with the way that Gary did 
the testimony.''
    Mr. Foster later stated that he was going to use that 
transcript in his training of other attorneys.
    Mr. Hanson, who was your source that said Mr. Aguirre 
behaved unprofessionally?
    Mr. Hanson. This was a senior counsel in my group.
    Senator Grassley. And he was an attorney with the SEC.
    Mr. Hanson. That is correct.
    Senator Grassley. Or was he an attorney for the defense 
bar?
    Mr. Hanson. He was an attorney with the SEC.
    Senator Grassley. All right.
    Did you ever check what you had heard about the testimony 
with Mr. Foster?
    Mr. Hanson. I did not.
    Senator Grassley. Why not?
    Mr. Hanson. The attorney that gave me that information is 
an individual I think highly of. I respect his judgment. He has 
been doing litigation for a number of years, so whatever he 
says to me I generally take as a given.
    Senator Grassley. How about Mr. Ribelin? Did you ask him 
about Gary's conduct during the testimony?
    Mr. Hanson. I did not.
    Senator Grassley. Well, let us ask Mr. Ribelin.
    You were there. Do you think that Gary did a good job 
questioning Arthur Samberg?
    Mr. Ribelin. Absolutely.
    Senator Grassley. Mr. Stachnik, as you know, I was troubled 
about your inquiry into Mr. Aguirre's allegation from the 
beginning. I have to tell you, the more I learn, the more 
troubled I get.
    Your office did little more than look at his letter to 
Chairman Cox, call his supervisors, accept what they told you 
at face value. Just calling up people accused of wrongdoing and 
asking them if they did it is not my idea of an investigation 
that you should have performed.
    You did not talk to any of the people at the SEC who 
identified in his letter as agreeing with him. You did not 
contact Mr. Aguirre to get more detailed information or learn 
whether he had evidence to support his claims, which it turns 
out he did.
    Since you did not talk to Mr. Aguirre, you closed the 
investigation without even looking at an e-mail from Mr. Hanson 
where he admits to talking about John Mack's ``political 
clout''. In short, you only got one side of the story and you 
did not seem very interested in getting the other side.
    In my opinion, an Inspector General is supposed to be 
independent-minded. When a whistleblower comes forward, you 
should take these allegations seriously, not help play defense 
for the SEC. So my first question is, can you explain why your 
office was not more aggressive in looking at these allegations 
when they were first brought to your attention last year?
    Mr. Stachnik. Senator, we did do a professional and 
thorough investigation, in my judgment, at the time. We did 
assign the most senior staff in my office to this matter. They 
did review documents, e-mails. They analyzed metadata, as well 
as interviewing the personnel within the SEC.
    My judgment in this matter was that the allegations in the 
two letters that came from Mr. Aguirre to Chairman Cox, the 
allegations were not validated by the investigation. These 
included Mack's testimony not being taken. That was a matter of 
timing rather than whether or not it would or would not be 
taken.
    It included the phone call between Linda Thomsen and, I 
believe it was Mary Jo White, although I may be mistaken about 
that, which we determined was normal communications between the 
Director of Enforcement.
    We looked at documents which indicated that Mr. Aguirre did 
have access and did participate in lots of meetings concerning 
all of the matters he claimed he was not invited, and did not 
participate in the meetings.
    We looked at the allegation about his personnel file and 
found out, through analysis of metadata, that the supplemental 
evaluation, unlike the allegation, was prepared back in an 
appropriate time and it was not post-dated.
    We also determined that his termination was based on a 
dysfunctional relationship between himself and his supervisors. 
It was pretty obvious that it had been going on. Based on 
contemporaneous memos, e-mails, and so forth, it was pretty 
obvious that it was going on for a long period of time. This 
was not something that came up suddenly.
    Senator Grassley. Well, does it not bother you, if your 
office is independent of the SEC and you can do your work as an 
Inspector General ought to do the work, and does it not raise a 
red flag when somebody says that you ought to be careful 
because somebody has got a lot of political clout?
    I mean, after all, you are talking about an independent 
agency. But any place in the government. When you start 
worrying about somebody that has political clout, you are not 
doing your job.
    Mr. Stachnik. I agree, Senator. That is the reason that we 
did open the investigation. I was very disturbed by the 
allegations that were made by Mr. Aguirre. The investigation 
was designed to validate those allegations.
    Senator Grassley. Well, let me ask you, do you still stand 
by the closing memorandum that you did? If so, why did you 
reopen the investigation?
    Mr. Stachnik. The reason that I decided to reopen the 
investigation was a combination of factors. The serious 
concerns expressed by the Senate, your Committee and Senator 
Specter's committee, were clearly part of that decision. The 
concerns expressed to me by Chairman Cox of the SEC was also 
part of that decision.
    In my estimation, we did a professional and rigorous 
investigation. However, we are not infallible. We are taking 
another look at the matter. That is the reason we reopened it. 
I reopened it.
    Senator Grassley. All right.
    Well, my last question is going to followup on that. Your 
office made no written document request to the SEC before 
closing this initial investigation. Yet, after Congress started 
raising questions, you did reopen it, as we just discussed, and 
have since issued a broad subpoena to Mr. Aguirre calling for 
records of his communication with this Committee and with my 
own Finance Committee.
    You are now attempting to have the Justice Department 
enforce that subpoena in court, even though you are aware that 
we have raised constitutional objections to your office seeking 
confidential communications between a whistleblower and a 
Congress about an ongoing Congressional inquiry, which includes 
questions about the effectiveness of your office, which, if you 
are successful, you might as well close down the whole business 
of whistleblowing and close down a major source of information 
for Congress doing its constitutional job of oversight.
    Could you explain to me why it is necessary for you to have 
access to communications between Mr. Aguirre and the committees 
investigating his allegations?
    Mr. Stachnik. First off, I do have a parochial interest in 
whistleblowers, as part of the IGs' community that depends on 
whistleblowers, as well as other individuals within the 
government, to provide information and leads for investigation, 
so it is not the case that we find them un-valuable.
    I can tell you, in terms of this subpoena enforcement 
matter that you were discussing----
    Senator Grassley. Yes. Why do you need access to 
communications? I mean, you should have all this information. 
If you are doing your job and you are talking to 
whistleblowers, why do you need what they give us?
    Anyway, we have made an entreaty to you to agree to avoid 
interfering in our investigation. If you would narrow the scope 
of your subpoena to exclude his communications with our 
committee, it might get you the information you need and you 
are not interfering with any constitutional checks and balances 
and things of that nature. Also, you just said that you respect 
whistleblowers.
    Mr. Stachnik. Yes, sir.
    Senator Grassley. Well, then you do not seem to be 
respecting Mr. Aguirre very well in this whole process.
    Mr. Stachnik. I am unaware I did anything disrespectful to 
Mr. Aguirre.
    Senator Grassley. Well, I am using that as an example. Do 
you really have respect for whistleblowers in that respect? In 
other words, if you consider them of value, why do you not take 
the word of the whistleblower sitting beside you?
    Mr. Stachnik. Well, I am not an advocate for 
whistleblowers. That is not the function of the Inspector 
General.
    Senator Grassley. But you ought to be an advocate for their 
information that they give you.
    Mr. Stachnik. We did. That is the purpose of the 
investigation, was to validate the information and the 
allegations made by Mr. Aguirre.
    Senator Grassley. What are the chances of narrowing your 
request to Congress?
    Mr. Stachnik. I have been advised by the Department of 
Justice not to comment on that. I can tell you that, 
personally, I am not looking to make a fuss about this matter. 
It is up to lawyers.
    Senator Grassley. You may be playing footsie with an 
executive branch of government that wants to curb Congressional 
inquiries even beyond this one. That is a precedent that could 
be set.
    Chairman Specter, I think we need to consider legislation 
that ensures that agencies cannot intimidate whistleblowers by 
issuing subpoenas to them for all of their communications with 
Congress. We need to ensure that people feel free to come to us 
with information about waste, fraud and abuse without worrying 
that they are going to get slapped with a subpoena.
    Chairman Specter. Senator Grassley, there is no doubt about 
that. We have some of that included in the draft legislation 
which has been circulated, but we need to be sure that Mr. 
Ribelin, for example, who stepped forward and has given candid 
testimony, backed up by documents, will be protected. There is 
no doubt about that.
    And the point that you are making with Mr. Stachnik is very 
well founded. We had not come to the point of questioning him, 
but he closed his investigation without questioning Mr. 
Aguirre, which is sort of incomprehensible.
    For the Inspector General to seek the testimony, what Mr. 
Aguirre told the Finance Committee, what he told the Judiciary 
Committee, is just really extraordinary. It is just really 
extraordinary that our oversight and our inquiries would be 
subject to intimidation. I mean, that is what it is. You are 
getting even with Mr. Aguirre for talking to the Finance 
Committee and the Judiciary Committee. Is that not about the 
size of it, Mr. Stachnik?
    Mr. Stachnik. Not from my perspective, no. I am trying to 
get the information necessary to complete the reopened 
investigation.
    Chairman Specter. Well, why do you not ask Mr. Aguirre? Why 
not ask Mr. Aguirre for what he has told the committees?
    Mr. Stachnik. We have talked to Mr. Aguirre's attorneys. My 
attorneys have talked to his attorneys. We will take his 
statement from this Committee and look at that carefully.
    Chairman Specter. Well, any information you want from Mr. 
Aguirre, you can get from him. Why do you have to----
    Mr. Stachnik. We have asked Mr.----
    Chairman Specter. Let me finish the question. Why do you 
have to implicate what the Judiciary Committee has heard from 
Mr. Aguirre?
    Mr. Stachnik. We have asked Mr. Aguirre directly for 
information and he has declined to give us that information.
    Mr. Aguirre. I have to speak on that. May I?
    Chairman Specter. Go ahead, Mr. Aguirre.
    Mr. Aguirre. I provided them 250 pages of details, a 45-
page statement backed up by 200 pages of exhibits, laying out 
everything. This statement that I gave them, I have given to 
your staff. I have never had anyone come back and say, it is 
not enough information for us to understand.
    I do not know why they are doing this. I am not sure it is 
a search for information any more. I think it is something 
else. The information that they have got now is voluminous. 
Yet, we continue on.
    Chairman Specter. Mr. Berger, do you care to make a 
comment? There has been some media speculation as to your 
joining the Debevoise firm after there was some involvement by 
the Debevoise firm with Morgan Stanley and Mr. Mack. I want to 
give you an opportunity to comment about that.
    Mr. Berger. Thank you, Senator. I appreciate the 
opportunity to comment on that. The first statement, is there 
is absolutely no correlation whatsoever between my decision to 
seek employment outside of the Commission and the Pequot 
investigation, or any investigation.
    Chairman Specter. How long a period of time was there 
between your involvement in the Pequot investigation and the 
involvement of Mr. Mack and the representation by Debevoise and 
the time you sought employment with Debevoise?
    Mr. Berger. My understanding is that Debevoise represented 
not Mr. Mack, but the board of directors of Morgan Stanley, for 
6 days in June of 2005. I first approached Debevoise in January 
of 2006.
    Chairman Specter. Anything further you want to say about 
that?
    Mr. Berger. I think I have said everything.
    Chairman Specter. All right.
    Mr. Stachnik, are you saying, in effect, that as far as you 
are concerned, you do not want the communications with the 
committees?
    Mr. Stachnik. I have been advised by the Department of 
Justice not to discuss this matter. I apologize.
    Chairman Specter. Well, they are representing you. But you 
are the investigator. You are the Inspector General. You are 
the party in these proceedings. Do you want the information 
which was given to the Judiciary Committee?
    Mr. Stachnik. We need the information that would allow us 
to conduct the investigation.
    Chairman Specter. Now answer my question.
    Mr. Stachnik. I am sorry. I have to go with the advice 
given to me by the Department of Justice and I cannot discuss 
the matter.
    Chairman Specter. Well, has the Department of Justice told 
you that you should get the information from the Judiciary 
Committee?
    Mr. Stachnik. We did request the information from the 
Judiciary Committee. We requested it in writing, as well as 
orally. My understanding is, you have a Senate rule----
    Chairman Specter. Now see if you can focus on my question.
    Mr. Stachnik. All right. I am sorry.
    Chairman Specter. Did the Department of Justice urge you to 
get the information from the Judiciary Committee or is the 
Department of Justice not really your lawyer in the matter to 
proceed it in court to see if they can compel it?
    The Department of Justice does not make the decision as to 
whether the information is necessary for your investigation, 
Mr. Stachnik. You make that decision.
    Mr. Stachnik. That is correct.
    Chairman Specter. Well, so are you saying that you want 
that information from the Judiciary Committee?
    Mr. Stachnik. Again, Senator, the Department of Justice has 
advised me not to discuss the matter. I do not know anything 
more----
    Chairman Specter. Oh. Now the Department of Justice has 
advised you not to discuss the matter with the Judiciary 
Committee?
    Mr. Stachnik. That is correct.
    Chairman Specter. The plot grows thicker all the time.
    Well, I think we have gone about as far as we can go here. 
The draft legislation which would permit the parallel 
activities by the Department of Justice and the SEC, and would 
provide greater inducements to whistleblowers and would provide 
for some regulation where you have small investors and you have 
pension funds, we are going to put that into the legislative 
process and introduce that legislation. Obviously nothing is 
going to happen in the 109th Congress, but this is going to be 
a matter for analysis and pursuit later.
    At a minimum, it is very, very troubling what the SEC has 
done here, Ms. Thomsen, Mr. Berger, Mr. Kreitman, Mr. Hanson. 
At the very minimum, it is very, very troubling. When you have 
a matter referred to you and it sits dormant for 2 years, and 
you have a very vigorous investigator like Mr. Aguirre coming 
forward and you have him working from September of 2004 and 
getting very good reports as late as June 29, 2005, and then 
because he is pressing on what is admitted by your own 
memoranda, Mr. Hanson, to have political overtones, to have 
``juice'', and you have one of your professionals of long 
standing, Mr. Ribelin, coming in and saying something is 
smelly, and then your agency takes no action until there is a 
Judiciary Committee hearing in June and you finally get around 
to taking Mr. Mack's deposition 5 days after the statute of 
limitations has run, and you have the Inspector General of the 
SEC taking punitive action against Mr. Aguirre--that is what it 
is, Mr. Stachnik.
    Senator Grassley expressed it very, very well on the kind 
of an investigation you have run here, which is not 
professional. You are not the only one who knows something 
about running investigations.
    But we are not finished with this yet, ladies and 
gentlemen. We are not finished with this. We have people under 
oath with directly contradictory testimony. It is very, very 
troubling, at a minimum.
    That concludes the hearing.
    [Whereupon, at 12:03 p.m. the hearing was concluded.]
    [Questions and answers and submissions for the record 
follow.]



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